Deut - dwpbank.de · business and to offer our clients state-of-the-art infrastructure services. To that end, we will con-tinue to optimise processes and technologies going forward

Deutsche WertpapierService Bank AG

Annual Report2016

Key figures

2016 2015

Operating business

Clients Number 1,420 1,482

Securities accounts Number (millions) 5.0 5.2

Transactions Number (millions) 22.7 24.0

Results

Net fee and commission income EUR thousand 222,107 231,563

Administrative expense EUR thousand 208,169 207,109

Result from ordinary activities EUR thousand 12,749 17,368

Net income for the financial year EUR thousand 8,725 11,128

Total assets EUR thousand 582,493 473,614

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2016 ANNUAL REPORTDeutsche WertpapierService Bank AG

4-5 Letter from the Board of Management

6-7 Standardisation of services and new pricing model: Success through high quality and transparent standards in the new catalogue of services

8-9 Our Focus: Dr Heiko Beck / Thomas Klanten / Markus Neukirch

10-11 Regulatory environment and institutional business: dwpbank facilitates successful T2S migration and focuses on implementing MiFID II

13-38 Management report

40-43 Annual financial statements

44-55 Notes to the annual financial statements

56 Country-by-country reporting 2016

57 Audit opinion

58-59 Report of the Supervisory Board

60 Members of the Advisory Board

dwpbank Annual Report 20164

In 2016, dwpbank continued to successfully transform itself. With the aim of further strengthening our market and client focus, we stream-lined our processes and optimised our cost struc-ture. This has enabled us to position ourselves as the leading securities services provider. In times of increasing regulation, dwpbank offers tailored solutions which render the securities business attractive, secure and sustainable for its clients. We have also turned our attention to digitalisation so that we can offer additional services based on our unrivalled expertise in the securities business and our unique technological know-how. dwpbank 4.0 – our initiative aimed at enhancing quality and efficiency – will enable us to further cement our position as a leading securities ser-vices provider in Germany and position us to achieve further growth.

Our new catalogue of standardised services represents one major milestone along this jour-ney. We developed this catalogue based on a results-oriented dialogue with our clients. Our range of services is now transparently packaged

into a significantly streamlined catalogue. The aim is to increase quality, reduce operational risks and leverage additional efficiency potential for our clients. We have also developed our future pricing model based on the catalogue of standardised services.

In financial year 2016, the volatile market environ-ment in the securities business again had a posi-tive impact on Deutsche WertpapierService Bank AG. At approximately 22.7 million, the number of transactions processed exceeded our projections. At the same time, the average number of items per securities account increased from 3.51 at the end of 2015 to 3.73 at the end of 2016. The number of end-client securities accounts managed as at the end of the year was 5.0 million, down somewhat as compared to the 5.2 million accounts managed as at the end of 2015. This illustrates that dwpbank was not spared from the general trend towards a reduction in the number of securities accounts in Germany. In 2016, earnings before taxes amounted to EUR 12.7 million. Net income for the financial year amounted to EUR 8.7 million.

GENTLEMEN,LADIES AND

Markus Neukirch Member of the Board of Management | Dr Heiko Beck Chairman of the Board of Management | Thomas Klanten

Member of the Board of Management

With preparations underway to implement the revised EU Markets in Financial Instruments Directive (MiFID II) and the TARGET2-Securities market infrastructure project, our work in 2016 again focused on major projects affecting the capital markets. We were therefore very pleased to announce the connection of Deutsche Börse AG‘s central securities depository, Clearstream, with the European Central Bank‘s TARGET2-Se-curities settlement platform on 6 February 2017. In total, 18 central securities depositories and the markets they serve have now been migrated to T2S since it went live on 22 June 2015. The migra-tion of the German market, which accounts for some 40% of expected T2S transaction volume, was of particular significance. As a provider for more than three-quarters of Germany‘s credit institutions, we played a key role in this process.

Another important issue which demanded our close attention in 2016 was the new investment tax slated to enter into force in early 2018. Be-ginning in 2018, funds launched in Germany will be required for the first time to pay a 15% tax on German dividends, rental income and disposal gains from the sale of German properties.

In order to further strengthen our market and client focus, we recruited a new colleague with a high level of IT and process expertise: Markus Neukirch. On 1 February 2017, Mr Neukirch – who has many years‘ experience in market operations – succeeded Dr Christian Tonnesen, who left the Company of his own accord at the end of 2016 to pursue new challenges. We look forward to working together as the Board of Management to bolster dwpbank‘s position as a leading secu-rities services provider.

We will continue to work together with our cli-ents to discover the areas in which dwpbank can offer additional services. Our aim is to play an active role in shaping change in the securities business and to offer our clients state-of-the-art infrastructure services. To that end, we will con-tinue to optimise processes and technologies going forward and will further raise our already high standard of quality.

For many years now, dwpbank has offered high-quality, attractively priced outsourcing ser-vices to relieve clients‘ cost pressure and help them meet increasing regulatory requirements. The high level of client satisfaction motivates us to push forward with our development. Our cli-ent survey, which we conducted in the autumn of 2016, revealed that 95% of clients considered dwpbank‘s technical systems to be highly reliable. 93% of respondents considered dwpbank to be a key strategic partner in their own successful efforts to position themselves on the market. At the end of 2016, 1,420 institutions in the German banking industry relied on dwpbank services.

We would like to express our gratitude to our employees for their hard work. It is thanks to their commitment that dwpbank is the modern and strong institution that it is. We would also like to thank our clients for their support and their trust. We look forward to further developing dwpbank in close dialogue with them.

Kind regards,

Dr Heiko Beck Thomas Klanten Markus Neukirch

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Profound market changes and a more stringent regulatory environment are having an impact on the business models of dwpbank and its cli-ents. Increasing pressure on earnings and costs is forcing players in the banking sector to increase their efficiency in order to keep up with competitors. One key lever in doing this is to outsource back-office functions. dwpbank is a leading se-curities services provider which has a firm grasp of the needs of its clients and is developing com-prehensive solutions and compelling standards. Its services cover the entire value chain, from bundling large transaction volumes to securities settlement, entry and custody through to imple-mentation of regulatory requirements relating to the securities business.

STANDARDISATION OF SERVICESAND NEW PRICING MODEL

SUCCESS THROUGH HIGH QUALITY AND TRANSPARENT STANDARDS IN THE NEW CATALOGUE OF SERVICES

In 2016, dwpbank successfully continued to push forward with its transformation, which it had be-gun in 2014. It has made its portfolio of services even more transparent against the backdrop of the increasing regulation of the securities busi-ness, and tailored it to better suit the needs of its clients. A host of new reporting and documen-tation requirements as well as other regulatory measures have been integrated into the services. Nevertheless, we have continued to optimise costs.

A new service portfolio through dialogue with clients

dwpbank consulted with its clients to define the securities services which are included in the standard package and those which are offered as individual solutions. The result is a significantly leaner offering: nearly half of the 723 original components have been consolidated into the standard package. Most of the services which had not previously been included in the stand-ard package are included in the „core data“ and „securities account transfers/deliveries“ service categories. Increased quality, reduced operational risks and greater efficiency gains – these are the aims of the new and transparent catalo-gue of standardised services which was publis-hed in the spring of 2016. The modified service agreements will enter into effect in 2018.

Increased quality, reduced operational risks and greater efficiency gains – these are the aims of the new and transparent catalogue of standardised services which was published in the spring of 2016.“

„

The services offered by dwpbank help to increase revenue from the securities business

With 417 clients and approximately 1,500 connected institutions, three-quarters of all banks in Germany rely on dwpbank‘s service offering. The broad expertise of our employees and our extensive service offering allow clients to focus on their core business so that they can offer a high standard of quality, efficiency and low risk. The services offered by dwpbank thus help to increase revenue from the securities business.

The cornerstone for the new pricing model was also laid in financial year 2016 and the new model will take effect on 1 January 2018. The out-comes of more than 160 client consultations held between March and August 2016 served as the baseline for calculation. The new pricing model will offer transparency and clarity and will help achieve the clients‘ standardisation objectives.

Extensive offering of savings plans significantly expanded

As the leading securities services provider, dwpbank has responded to the increase in de-mand for savings plans for exchange traded funds (ETFs) and certificates by expanding its service offering. At the end of 2016, dwpbank managed more than 109,626 savings and dis-bursement plans on its powerful WP2 securities settlement platform. Automated reinvestment management makes it possible to transfer all income for re-investment, whether that income comes from funds or from equities.

In 2016, dwpbank also focused on its Back Office Service Centre and a range of reviews including post-transaction compliance checks, as well as services for custodians and assistance with regu-latory issues.

The committee meetings in 2016 also made a contribution to continuing the dialogue with dwpbank‘s clients, providing up-to-date infor-mation on current developments and discussing key issues. The contributions of clients who made time for these committee meetings proved es-sential.

dwpbank 4.0 – offering added client value through new digital services

„Be good, get better.“ dwpbank launched its initi-ative to increase efficiency and raise the standard of quality with this objective in mind – and has pushed forward with its digital transformation as it systematically refines its business model. Using the data available to dwpbank in its role as a central service provider, we can offer additional digital services which increase client ad-ded value. dwpbank is harnessing the manifold opportunities that come with digitalisation to turn Big Data into Smart Data for its clients.

Modern forms of collaboration such as Hacka-thon offer important avenues for further de-veloping digital services. Smart, innovative data processing opens up additional efficiency gains and insights into the development of business models and transactions. Work is progressing apace on additional projects such as „Big Data, Data Mining & Analysis“. The focus also lies on process automation. Going forward, this will make it possible not only to identify errors but also their causes so that they can be remedied.

Together with our clients, dwpbank will continue to refine our service portfolio in 2017, and work on anticipatory implementation of regulatory requirements and developing the necessary sys-tem extensions. With a modern and appealing brand image, dwpbank will further cement its leading role as a securities services provider and offer its clients compelling, tailor-made and in-novative solutions.

The new pricing model offers transparency and clarity when it comes to services.“

„7


Thomas Klanten IT, Finance and Risk

ManagementMarkus Neukirch Operations

Dr Heiko Beck Corporate

Management and Client

Management

DR HEIKO BECK, THOMAS KLANTEN,OUR FOCUS

MARKUS NEUKIRCH

”As a leading securities services provider, dwpbank offers the right solutions in times of tech-nological change and increas- ingly stringent regulations.“

”We are leveraging the opportunities provided by digitalisation and offer added client value through innovative services.“

“Our clients consider us a key strategic partner for their own successful efforts to position themselves on the market.“

“In 2016, dwpbank implemented key initiatives to successfully launch the major projects TARGET2-Securities and MiFID II.“

“A partner for legislators, supervisory authorities and industry associations helping to shape the development of the securities business.“

”In 2016, we sharpened dwpbank‘s focus on the markets and its clients. Our motto is: be good, get better.“

”With a modern, transparent and stream-lined catalogue of standardised services, dwpbank has achieved an important, cost-effective milestone in standardising services.“

”dwpbank is a reliable partner for the German Cooperative Financial Services Network, the German Savings Banks Financial Services Network and for private and commercial banks.“

”Together with our committees, we have laid the groundwork to help prepare our clients for the market challenges to come.“

”The results of our efforts to consolidate our services form the basis for our new pricing model.“

”The increasing regulatory requirements also relate to the issue of market abuse. We offer our clients a comprehensive service offering for transaction monitoring.“

”In 2016, dwpbank once again reduced the risks of securities settlement while raising the level of quality.“

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TARGET2-Securities, MiFID II and the Market Abuse Regulation (MAR): a large number or regulatory measures have been launched in the wake of the financial crisis in order to stabilise the financial system and protect investors. The complexity of the regulations and increasing cost and competitive pressure make a reliable partner indispensable. dwpbank is the leading securi-ties services provider in Germany and a strategic partner for the banking industry, and in 2016 it worked hard to implement a large number of regulatory requirements, thus helping its clients to successfully position themselves on the market.

Mastering the fourth wave of T2S migration with dwpbank

The focus was placed on large-scale, highly com-plex projects such as the introduction of the Eu-ropean settlement platform, TARGET2-Securities (T2S), the revised EU Markets in Financial Instru-ments Directive (MiFID II) and the implementation of technological solutions for the introduc-tion of the Market Abuse Regulation (MAR). Ano-ther topic was the analysis of the impacts and dependencies for the introduction of the funda-mental reform of taxation of investment income, which will enter into force in early 2018.

settlement platform. As the central bundler of securities services, dwpbank was a reliable part-ner for successfully implementing the regulatory requirements, relieving its clients of a consider-able burden and helping them to achieve effi-ciency gains. In the fourth wave of the migration, the central securities depository of the Deutsche Börse Group, Clearstream, was linked up with the European Central Bank‘s T2S platform. Deutsche Bundesbank and Clearstream Banking AG were responsible for managing this mammoth project. The final wave of the migration for the time being will take place in September 2017. Finland will be migrated at a later date to be determined. A total of 21 national markets have agreed to take part.

The benefits are obvious: for the first time ever, the T2S platform will make it possible to settle all securities transactions throughout the entire eu-rozone via a central bank account with Deutsche Bundesbank. Further simplifications for banking industry clients result from the introduction of European market standards for implementing corporate actions. One key change is that beginning in January 2017, dividends are no longer paid out to shareholders on the first day after the general meeting, but instead on the third day.

Transaction volume on T2S nearly doubled

dwpbank‘s successful project work since 2013 in the context of European securities market har-monisation through the T2S project has paid off. Since the starting gun was fired in Germany in early February 2017, it has been processing its se-curities instructions in existing and new T2S mar-kets using the platform. The results are clear: the completion of the fourth wave has seen transac-tion volume on the platform nearly double.

In 2016, dwpbank successfully paved the way for the fourth wave of migration to the TARGET2-Securities (T2S) platform for its 1,500 connected institutions.“

„

DWPBANK FACILITATES SUCCESSFUL T2S MIGRATION AND FOCUSES ON IMPLEMENTING MIFID II

REGULATORY ENVIRONMENT AND INSTITUTIONAL BUSINESS


Following more than three years of intensive preparations, on 6 February 2017 dwpbank suc-cessfully assisted in the migration of the Ger-man market to the TARGET2-Securities (T2S)

In 2016, dwpbank also focused on another major project: preparing to implement the EU Markets in Financial Instruments Directive (MiFID). The legislation, known as MiFID II, consists of a Direc-tive (MiFID) and a European Regulation (MiFIR), which is immediately enforceable. Along with the Basel III regime, MiFID II is a key component aimed at stabilising and modernising the Euro-pean financial system.

Intensive preparations for MiFID II

The revised legislation represents a major chal-lenge for all involved parties: the aim is to render market structures more resilient and efficient, as well as to increase transparency. The planned modifications through MiFID II will have a funda-mental impact on dwpbank‘s clients as a result of the more stringent requirements in relation to investor protection and documentation. The particular challenge with MiFID II/MiFIR remains the short time frame in which to accomplish the transition, despite it having been postponed by one year. Credit institutions must be compliant by 3 January 2018.

The EU Market Abuse Regulation (MAR) and the EU Directive on criminal sanctions for market abuse (Market Abuse Directive, MAD) represent additional regulatory issues on dwpbank‘s agen-da. Compliance with the far-reaching regulations has been mandatory since 3 July 2016; these regu-lations are intended among other things to com-bat insider trading and market manipulation. To that end, dwpbank worked in close cooperation with representatives of clients and associations to develop a service to identify transactions which must be reviewed.

dwpbank on track for investment tax reform

In financial year 2016, dwpbank remained on course in its preparations for the fundamental reform of investment taxation. It analysed the impacts on its clients at an early stage. The re-form, which is set to enter into force in early 2018, will affect securities settlement in virtually every key area. Many issues currently remain unre- solved. dwpbank took an active role in the deba-te on behalf of its clients and helped to shape the German banking industry‘s responses to the German Federal Ministry of Finance (BMF) for its clients. From today‘s perspective, the reform will simplify things but may also raise new problems for investors and custodians alike.

Expansion of institutional services on the agenda for 2017

The more stringent regulatory requirements and technological change are creating increasing cost pressure and forcing every market participant to boost efficiency. With its unique expertise in se-curities services, dwpbank will continue to work closely with its clients going forward to ensure a smooth and successful implementation of both existing and new regulatory requirements. In addition to the focal points already mentioned, dwpbank will also place greater emphasis on de-veloping new and expanding existing services for its institutional clients in 2017.

„ dwpbank stands for efficiency and competence in the securities business. As the central bundler, it has systematically implemented the regulato-ry requirements for its clients, thus contributing to security in the securities business.“

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dwpbank Geschäftsbericht 201612

13

2016 MANAGEMENT REPORTDeutsche WertpapierService Bank AG

14-15 General information

14 Business model

14 Objectives and strategies

14 Equity investments

15 Branch offices

16-25 Economic report

16 Macroeconomic and sector environments

19 Course of the business

21 Financial position

26-39 Staff and welfare, risk report and report on expected developments

26 Staff and welfare

28 Risk report

35 Outlook and report on opportunities


1.1 Business model

The object of the Bank is to provide securities ser-vices for banks with a focus on financial brokerage and on securities custody and management.

By bundling large transaction and management volumes from all three sectors of the German financial system, dwpbank generates a cost ad-vantage through economies of scale and econo-mies of scope relating to products, services and expertise. It helps its clients to reduce costs by as-suming operational risks. The Bank implements regulatory requirements affecting the securities business centrally for all member banks on its WP2 securities settlement platform in order to reduce costs and ensure uniform compliance.

As a market-oriented service provider, dwpbank places its focus on meeting the needs of its cli-ents – as an infrastructure provider offering a stable, secure, highly automated and thus effi-cient settlement service.

1.2 Objectives and strategies

dwpbank‘s mission is to become the leading infrastructure services provider in the field of securities services (transaction banking and as-set services), offering a comprehensive portfolio of services and highly standardised, automated process chains. We aim to systematically leverage existing opportunities to expand our market position. Operational and IT units need to be able to react at short notice to market opportunities, client requirements and regulatory changes.

Our service portfolio is based on the needs of our clients from the two major German banking associations, the German Savings Banks Finan-cial Services Network (Sparkassen-Finanzgruppe) and the German Cooperative Financial Services Network (genossenschaftlichen FinanzGruppe), as well as private credit institutions, and inclu-des business process outsourcing (BPO) as well as other services such as custody, including through management by external service providers. Standard services are also made available to

1 GENERAL INFORMATION

other clients from every sector of the German banking industry. dwpbank‘s mission also includes integrated securities services for all classes of securities through the integration of techni-cal custody management and settlement in dwpbank‘s WP2 system. The added value for clients lies in the provision of bundled, standar-dised and thus efficient services characterised by a high level of stability and quality. Bundling the implementation of regulatory requirements makes it possible for dwpbank to offer its cli-ents significant added value by reducing costs and ensuring uninterrupted compliance with the supervisory framework. Strategic market de-velopments, such as those relating to the use of the Eurosystem‘s TARGET2-Securities settlement platform, are leveraged to tap into business and efficiency potential for clients.

In financial year 2016, the „dwpbank 4.0“ initia-tive was launched to realise the Bank‘s business strategy and to help it achieve its objective of be-coming a leading infrastructure services provider in the field of securities services. Previous measures aimed at standardising and automating the services offered by dwpbank were bundled into the initiative and additional measures were added that aim to systematically align all dwp-bank processes in terms of quality, effectiveness and efficiency. A further focus of the initiative is the targeted expansion of the business model, for instance in the area of digital services, and the continued development of the IT infrastructure to render it future-facing and cost-efficient.

1.3 Equity investments

dwp Software Kft. (Budapest, Hungary)

dwpbank is the sole shareholder of dwp Software Kft., which was founded in 2001 and provides IT services in the banking sector. Under the terms of an agency agreement, this subsidiary performs IT consulting services and develops software solu-tions for dwpbank and third parties.

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Its key figures were as follows as at the balance sheet date (translated into EUR on the basis of the reference rate published by the ECB of EUR 1 = HUF 309.83 as at 30 December 2016):

Number of employees: 28 (previous year: 29) Sales: HUF 1,049 million (EUR 3,386 thousand, previous year: HUF 944 million) Total assets: HUF 362,151 thousand (EUR 1,169 thousand, previous year: HUF 319,145 thousand)

Cintac A/S (Roskilde, Denmark)

dwpbank acquired a 26% stake in the Danish software company Cintac A/S (stock corporation incorporated under Danish law) in 2012. The company serves to strategically secure software expertise, which is used as the basis for two core products of the WP2 system family deployed at

1.4 Branch offices

dwpbank offers its services from its headquar-ters in Frankfurt am Main as well as from its branch offices in Düsseldorf, Munich and Trois-dorf. The Herford branch was closed with effect from 31 December 2016.

dwpbank. It secures the long-term licence to Dy-namic AI and increases the options for cooperation with Cintac A/S.

Its key figures were as follows as at the balance sheet date (translated into EUR on the basis of the reference rate published by the ECB of EUR 1 = DKK 7.4344 as at 30 December 2016):

Number of employees: 1 (previous year: 1) Sales: DKK 2,439 thousand (EUR 328 thousand, previous year: DKK 2,639 thousand) Total assets: DKK 2,375 thousand (EUR 319 thousand, previous year: DKK 2,797 thousand)

MANAGEMENT REPORT General information I Economic report I Staff and welfare, risk report and report on expected developmentsANNUAL FINANCIAL STATEMENTS Balance sheet I Income statement I Notes to the annual financial statements


2.1 Macroeconomic and sector environments

2.1.1 Market environment and development of market-driven figures

2016 was once again marked by significant mar-ket volatility. On the first day of trading, 4 January 2016, the Deutsche Aktien Index (DAX) stood at roughly 10,485 points. The index closed the last trading day at 11,481 points, which was also the high for 2016 – over the course of the year, the DAX thus rose by 6.87%.

This increase was not a straight shot but rather was slowed by two significant corrections over the course of the year. Discussions concerning the state of the Chinese economy and a slight depreciation of the yuan in January caused the Shanghai Index to lose roughly 20% of its value. The German equity market was also hit by this development, reaching its low for the year of 8,752 on 11 February. Between March and May, the index recovered to approximately 10,620 points before the Brexit referendum in June briefly caused the DAX to fall sharply to 9,680 points. In the second half of the year, investor focus shifted to the election in the United States. After several days of slight declines immediately following the announcement of the election results, financial instruments in particular rose sharply towards the end of the year.

The positive performance of domestic mutual funds in 2015 (by the end of October 2015, asset management companies received net inflows of EUR 63 billion) was not repeated in 2016. Ac-cording to estimates by the German Investment Funds Association (BVI), net inflows amounted to just EUR 6.0 billion as at 30 November 2016. As previously in 2015, mixed funds accounted for the largest share of this by far, raising EUR 10.5 billion. According to the BVI‘s statistics, the biggest „losers“ were capital-protected funds, which were down by EUR 4.5 billion.

2 ECONOMIC REPORT

The volatile market environment for the secu-rities business again had a positive effect on dwpbank. Although the private and institutional clients managed by the clients of dwpbank were not able to reach the same number of transac-tions in 2016 as they had in 2015 – approximately 24.0 million – dwpbank did meet its target with approximately 22.7 million transactions.

The number of managed end-client securities accounts fell during the same period from 5.2 million as at the end of 2015 to 5.0 million as at the end of 2016. At the same time, the aver-age number of items per securities account increased from 3.51 at the end of 2015 to 3.73 at the end of 2016. The decrease in securities accounts managed mirrors the statistical trend calculated since 2007 by the Deutsche Bundesbank for the securities accounts managed by all institutions in Germany that are subject to reporting requirements. According to the Bundesbank data, the number of securities accounts declined by an average of 3.9% per year from 29.7 million in 2007 to 22.6 million securities accounts in 2016 (as at 10/2016).

2.1.2 Expanded regulatory and market infrastructure-driven requirements

As in previous years, regulatory requirements and requirements driven by the TARGET2-Securities market infrastructure project had an increasing impact on dwpbank‘s business model. This affected dwpbank both directly as a bank and also in its capacity as a service provider for the bundled implementation of requirements for its clients.

MiFID II/MiFIR

In financial year 2016, preparations continued for the implementation of the new requirements arising from the revised EU Financial Markets Directive and the corresponding Regulation. In

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February 2016, the European Commission sub-mitted the legislative proposals to postpone by one year, until 3 January 2018, the application of the provisions of MiFID II which entered into ef-fect upon publication of the Directive and Regu-lation amending MiFID II and MiFIR in the Official Journal of the EU on 30 June 2016. In April and May 2016, the European Commission published three delegated acts which set out more speci-fic provisions, particularly in the area of investor protection, and worked to finalise the outstanding technical standards. On 21 December 2016, the German Federal Ministry of Finance (BMF) published the government draft of the second Act Amending Financial Market Regulations on the basis of European Acts (Zweites Finanzmarkt-novellierungsgesetz, „2. FimanoG“). This act trans-poses the EU Directive into national law by 3 July 2017.

As part of its MiFID project, dwpbank has desig- ned a concept for implementing the require-ments based essentially on working hypotheses in the absence of specific requirements. Compre-hensive harmonisation work took place among all client groups via the associations‘ governing bodies and the client working groups established by dwpbank. The focal point of the project work was placed on the regulations concerning inves-tor protection (including product governance), market infrastructure, best execution and the new reporting requirements. To all intents and purposes, internal project milestones were achieved despite the absence of specific regu-lations in certain areas. Delays in the design phase will be compensated for in the upcoming development phase in 2017 through the use of additional resources. As a result of the complex harmonisation work and granularity of detail, as well as the addition of implementation require-ments, the budgeted project effort increased.

Securities custody requirements

On 18 March 2013, the amendments to the Ger-man Investment Code (Kapitalanlagegesetzbuch, „KAGB“) entered into force by virtue of the UCITS V Implementation Act (OGAW V-Umsetzungsge-setz). dwpbank prepared and initiated a variety of measures enabling those of its clients which serve as custodians to satisfy the statutory requirements. Focal points included obtaining legal opi-nions on the applicable insolvency law and the jurisdiction of those countries in which client assets are held in custody, as well as obtaining three-point declarations in the course of custodi-an assessment and monitoring activities. In addi-tion, dwpbank made preparations to ensure that the Bank would be compliant with future obliga-tions in the general custodian business to pro-tect client financial instruments under MiFID II.

TARGET2-Securities

Further milestones were reached in 2016 in the project driven forward by the European Central Bank (ECB) and the national central banks to de-velop an integrated European securities settlement platform – TARGET2-Securities (T2S). In the second wave of the migration, the Portuguese central securities depository (Interbolsa) and the Belgian central securities depository (NBB-SSS) went live on T2S as at 29 March 2016. With ef-fect from 12 September 2016, the third wave of the migration took place, involving Euroclear Bel-gium, Euroclear France, Euroclear Nederland, VP Lux (Luxembourg) and VP Securities (Denmark). dwpbank successfully handled the associated changes.



In preparation for the fourth wave on 6 February 2017, which saw the transfer of the functions of Germany‘s central securities depository, Clear-stream Banking Frankfurt, to T2S, dwpbank im-plemented comprehensive adjustments and car-ried out internal and external testing activities. New functions relating to the money and secu-rities side of the securities business were prepa-red for use. On the basis of the testing activities, dwpbank laid the groundwork for a successful internal implementation of T2S.

Revised market abuse legislation (MAD II/MAR)

As part of the reform of European legislation on the prevention and detection of market abuse (Regulation (EU) No 596/2014), dwpbank intro-duced a technical solution for itself and its clients in due time prior to 3 July 2016 which renders it possible to carry out a systematic analysis of se-curities transactions on the basis of daily reports to detect patterns of conduct indicating market abuse. Following the solution‘s launch, dwpbank responded to a large number of questions by the institutions using the solution and made further adjustments.

In 2016, dwpbank continued to bring its regulato-ry expertise to bear in offering its clients standar-dised support to efficiently and securely imple-ment the requirements arising under statutory provisions and changes in market practice.

International exchange of information to prevent tax evasion through financial relations by non-residents (AEOI/CRS)

Aside from the implementation measures already taken in 2015, 2016 also saw key project activities, particularly in preparation for the first report in 2017 (for the 2016 reporting period). For

dwpbank, this results in expanded requirements relating to system-side support for the adjust-ment or broadening of the processes for tax disclosures, as well as a widening of the tax reporting processes.

2.1.3 Improved security for clients with respect to dwpbank‘s systemic importance

Update to the recovery plan resolved

dwpbank submitted a recovery plan to BaFin and the Deutsche Bundesbank for the first time at the end of 2014. The content of the recovery plan was compiled as part of a project and was discussed with the Bank‘s competent governing bodies. dwpbank is required to update its recovery plan annually and on an ad-hoc basis where necessary. The focus of the revision in 2016 was on updating financial figures as at the balance sheet date, presenting the amended organisati-onal structure and consideration of the current supervisory requirements. The updated recovery plan was sent to BaFin in October 2016.

Work to remedy the findings from the audit pursuant to section 44 of the German Banking Act

The audit of dwpbank‘s business operations ordered by BaFin in 2015 pursuant to section 44 (1) German Banking Act (Kreditwesengesetz, „KWG“) related primarily to the propriety of the business organisation pursuant to section 25a (1) KWG with respect to risk management, risk- bearing capacity and due and proper remedies of the findings from the 2012 MaRisk audit focusing on IT. The audit report, which was submitted in the spring of 2016, confirmed the propriety of the business organisation with the exception of

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the validation of the risk quantification process for operational risks. With the exception of one finding relating to „AMA calibration ex-post“, all findings were remedied as planned in 2016. With respect to the next steps in the process for reme-dying the AMA calibration finding, dwpbank and BaFin are working closely together to arrive at a solution for remedying the finding in 2017.

Compliance with regulatory requirements in-creases the security, quality and stability of the outsourcing chain for dwpbank clients.

2.2 Course of the business

2.2.1 Progress towards becoming a leading infrastructure services provider

As part of the efforts launched in 2014 to trans-form dwpbank into the leading infrastructure services provider for securities services in the German market, dwpbank published its cata-logue of standardised services in the spring of 2016.

On the basis of a differentiated survey of each individual service configuration, more than 160 meetings were held with clients in one-on-one and group sessions between March and August to discuss in particular non-standard services and the necessity of using them. The number of services which deviate from dwpbank‘s stand-ard was reduced from 723 to 379 components. The remaining non-standard services are largely attributable to individual client business mo-dels, different interfaces and, where desired, cli-ent-specific reports.

In addition, the cornerstone for the new pricing model was laid in 2016. Compared to the previ-ous pricing structure, the new pricing model is more transparent and less complex, with roughly 60 products being consolidated into the stand-ard offering. In addition, it better reflects the cli-ents‘ business models.

The new pricing model is set to take effect on 1 January 2018.

2.2.2 Number of clients follows consolidation trend in German banking sector

As at the 31 December 2016 reporting date, dwpbank had a total of 417 direct clients (previous year: 430). The decline, which resulted from mergers and business discontinuations, reflects the trend in the German banking market. The German banking industry can be divided into the following groups of client institutions:

German Cooperative Financial Services Network(Genossenschaftliche FinanzGruppe)

In 2016, the two cooperative central banks DZ BANK and WGZ BANK merged and now operate under the name DZ BANK. A further 1,003 (previ-ous year: 1,052) local credit cooperatives and pri-vate banks in total are linked to the WP2 system via DZ BANK. dwpbank also had a direct contrac-tual relationship with Deutsche Apotheker- und Ärztebank eG (apoBank) and Bank für Sozialwirt-schaft AG, both of which use the WP2 system in the securities system services.



Public-sector banks, including the German Savings Banks Financial Services Network (Spar-kassen-Finanzgruppe)

6 state banks (Bayerische Landesbank, Bremer Landesbank, HSH Nordbank AG, Landesbank Hessen-Thüringen Girozentrale, Norddeutsche Landesbank-Girozentrale- and SaarLB), Westdeut-sche Immobilienbank AG and 379 (previous year: 389) savings banks from all 16 German states made use of services offered by dwpbank in 2016.

In 2016, system services were also performed for Landesbank Baden-Württemberg.

Private/commercial banking

The number of clients in the private and com-mercial banking sector amounted to 27 (previ-ous year: 29) institutions as at 31 December 2016, including BHF-BANK AG, Deutsche Postbank AG, Santander Consumer Bank AG and SEB AG.

2.2.3 Prompt and competent client support

Training centre

Seminars offered by the training centre in the year under review focused on securities-related issues and on transferring systems expertise to dwpbank clients. The securities-related seminars covered the „definitive withholding tax“, „FATCA“ and „WP2 for Compliance and Internal Audit“ and the seminars on systems technology covered „WPDynamik“ and „WP2 basics“ and were highly popular. The new events relating to the regula-tory requirements – „New requirements for QI Compliance“ and „MAD/MAR“ – were in high de-mand throughout Germany.

dwpbank‘s trainers held a total of approximately 180 seminars lasting one or several days with a total of 2,400 participants.

In addition to the seminars organised by dwpbank itself, the training catalogue also in-cluded a large number of events at the in-house academies of the German Savings Banks Finan- cial Services Network and the German Cooperati-ve Financial Services Network. The trend towards in-house training sessions at the clients‘ offices increased significantly; trainers are able to cover their clients‘ individual needs best here.

Furthermore, the training centre informed and thereby prepared all client groups for forthcom- ing system changes in WP2 in advance using WPUpdate. Versions of WPUpdate were creat- ed and published for individual clients for the six WP2 releases in 2016. This information was also available in WP2 manuals for specific client groups from each release date and could there-fore be used in day-to-day business by WP2 users.

Client Support Centre

The Client Support Centre provides an interface between dwpbank and the clients for all ques-tions or problems relating to day-to-day securi-ties settlement. Aside from telephone support, the centre also provides assistance for issues received via written entry channels, tickets and e-mail.

The volume of calls to the Client Support Centre in the reporting year fell by 10% year on year in 2016 to approximately 186,000 calls. In addition, more than 55,500 client tickets and 10,500 e-mail inquiries were processed.

Committee events

At the various committee meetings held by dwpbank in 2016, client dialogue was continued, experiences were exchanged, information was provided on current developments and clients outlined what they required from dwpbank. The

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Advisory Board, dwpbank‘s most important client board, held two regular meetings in 2016. Key is-sues discussed included the continued efforts to ensure the provision of standardised, automated and high-quality services, to continue developing a transparent and low-complexity pricing model and to further refine the Bank‘s service offering. Further focuses were the reports on activities in response to regulatory and statutory considera-tions and the reports from other dwpbank client bodies.

The reports and discussions at the meetings of the Project Committee and the Wholesale Com-mittee focused on the relevant client require-ments.

At the meetings of the „WPDirect“, „BOSC“, „Sales Support“, „Communication and Processes“, „Compliance“ and „Internal Audit“ working groups as well as in the Savings Bank and Pri- vate Bank Forums, representatives of clients and dwpbank discussed innovations in the securities business and dwpbank‘s client support solutions. The outcomes of the discussions and decisions made a contribution to adequately supporting the regulatory requirements affecting client institutions, strengthening the position of dwpbank clients among their competitors and increasing the appeal of the securities business for investors.

2.2.4 2016 executive survey confirms that dwpbank meets client expectations to a high degree

The survey of dwpbank client decision-makers conducted in September and October 2016 re-vealed a distinctly positive opinion trend as com-

pared to the previous client satisfaction survey conducted in 2013. More than 75% of participants noted improvements in comparable areas sur-veyed in 2013. The clearest gains in approval re-lated in particular to the clients‘ relationship and collaboration with dwpbank.

96% of all participating client institutions con-firmed dwpbank‘s competence as a key require-ment for their own success in the securities busi-ness. 95% found dwpbank‘s technical systems to be highly reliable and 93% considered dwpbank to be a key strategic partner in their own success-ful efforts to position themselves on the market.

The survey also revealed an increase in client loyalty, which had already been high. As a profes-sional infrastructure services provider, dwpbank is meeting client expectations to an increasing degree. The process initiated at the end of 2013 to transform the Bank and make it more effective and efficient was deemed to be the right step from a strategic point of view.

2.3 Financial position

2.3.1 Results of operations

Non-monetary performance indicators

Key factors influencing dwpbank‘s results of operations include in particular the volume of securities transactions settled and the volume of securities accounts managed.



The overall volume of securities transactions settled by dwpbank decreased by 6% year on year to 22.7 million. It should be taken into account that the previous year was affected by a variety of ex- traordinary market factors, such as the Greek debt crisis. Furthermore, client-induced reductions in business volume resulted in corresponding volume effects. In contrast to the structurally stable development of transaction volumes, the number of securities accounts managed fell in line with the trend seen in previous years, de- creasing by 5% to 5.0 million securities accounts.

The human resources optimisation and restructuring measures launched in previous years con-tinued to be systematically implemented in 2016. As a result, the number of people employed at the end of the year fell year on year to 1,319 active employees.

Monetary performance indicators

The primary monetary performance indicator at dwpbank is earnings before taxes, which are cal-culated using the key income and expense items. The corresponding management tools used by dwpbank are:

the annual planning and budgeting process, extrapolations and quarterly reporting (quarterly report), and year-on-year comparisons (actual/actual analyses, monthly financial report).

Non-monetary performance indicators 2016 2015 Change

Sales-driven transactions (millions) 22.7 24.0 -1.3

Securities accounts managed (millions) 5.0 5.2 -0.2

Number of employees at year-end 1 1,319 1,350 -31

Number of clients (credit institutions) 2 417 (+1,003) 430 (+1,052) -13 (-49)

1 Excl. Board of Management and inactive employees.2 The figure in parentheses includes the number of local credit cooperatives and cooperation banks connected to dwpbank‘s client DZ BANK.

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dwpbank‘s earnings before taxes amounted to EUR 12.7 million, which was only slightly lower than in the previous year despite significant ex-penses incurred in connection with the imple-mentation of personnel restructuring measures and project-related investments. Net income for the financial year fell accordingly from EUR 11.1 million to EUR 8.7 million.

The development of net fee and commission in-come reflected the aforementioned changes in volume. While the reduction in transaction vol-ume resulted in a decline in earnings by EUR 8.5 million, the lower average number of securities accounts under management caused a EUR 1.8 million decrease in earnings. EUR 0.8 million in

positive effects from depositary fees only slightly offset the negative volume effects. It should be noted that income recognised as part of fee and commission income also includes components recognised directly in equity, such as sales com-missions and settlement fees for other service providers, which are offset by similar amounts of expenses (EUR 538.8 million; previous year: EUR 568.4 million).

Net interest income primarily reflects income from coupons on the Bank‘s own portfolio of fixed-income securities, which are made availab-le as collateral for third-party institutions as part of securities services. While the investment port-folios remained comparable, lower nominal inter-

Income statement(EUR million) 2016 2015 Change

Interest income 3.6 3.5 +0.1

Interest expense -1.3 -0.9 -0.4

Net interest income 2.3 2.6 -0.3

Fee and commission income 761.7 801.5 -39.8

Fee and commission expense -539.6 -569.9 +30.4

Net fee and commission income 222.1 231.6 -9.5

Other operating income 51.1 43.8 +7.3

Other operating expenses -46.5 -46.5 -0.0

Net other operating income -4.7 -2.7 +7.3

Personnel expenses -111.8 -119.4 +7.6

Other administrative expenses -96.3 -87.7 -8.6

Total general and administrative expenses -208.2 -207.1 -1.1

Depreciation, amortisation and write-downs

-8.2 -7.0 -1.1

Earnings before taxes 12.7 17.4 -4.6

Taxes on income -4.0 -6.2 +2.2

Net income for the financial year 8.7 11.1 -2.4

Computational rounding differences may appear in the tables, so that the figures included therein may deviate from the precise figures.



est on replacement investments made during the year led to a corresponding decline in income.

As in the previous years, other operating income included items from the operating busi-ness in addition to non-recurring items. A change in the method used to calculate the underlying discount rate applicable to the measurement of pension provisions (switch from seven-year inte-rest rate to a ten-year rate) resulted in a positive effect on earnings amounting to EUR 15.0 million. By contrast, the full amount of the EUR 8.0 mil-lion difference resulting from the first-time ap-plication of the German Accounting Law Mod- ernisation Act (Bilanzrechtsmodernisierungsge-setz, „BilMoG“) in 2010 was recognised. The net positive effect of this amounted to EUR 7 million.

Additional provisions amounting to EUR 21.8 million were recognised for still-outstanding personnel restructuring measures in connec-tion with the full implementation of the „dwp-bank 2018“ partial reconciliation of interests. The implementation of these measures in the systematic pursuit of the objectives set in prior ye-ars will lay the groundwork for sustainably redu-cing personnel expenses.

There were positive effects within other operating earnings resulting on the one hand from in-creased project activity to implement client re-quirements in the context of merger and migration projects amounting to EUR 5.9 million. On the other hand, VAT effects, which in some in-stances related to prior years, resulted in a positi-ve effect on earnings in the current financial year amounting to EUR 1.6 million.

General and administrative expenses amounted to EUR 208.2 million and were at the same overall level as in the previous year. While personnel ex-penses fell by EUR 7.6 million, other administrati-ve expenses increased by EUR 8.6 million.

Without factoring in the effects from project capitalisation, current personnel expenses fell by EUR 5.4 million. In 2016, EUR 6.1 million in person-

nel expenses were capitalised in relation to the development of software components.

The increase in other administrative expenses by an overall amount of EUR 8.6 million was chiefly the result of the consolidation of IT pro-viders, which was launched in 2015. In addition to system migration expenses, this gave rise to cost increases due to the expanded outsourcing of IT services. Furthermore, non-recurring expen-ses were incurred in connection with setting out the specific details of dwpbank‘s strategic orien- tation and from implementing regulatory requirements.

Depreciation and write-downs reflected the EUR 6.9 million reduction in tangible fixed assets and the EUR 1.3 million decrease in the fixed-in-come securities held in the Bank‘s own portfolio. Amortisation of internally generated software components resulted in expenses totalling EUR 4.6 million (previous year: EUR 3.0 million).

2.3.2 Net assets and financial position

As at 31 December 2016, dwpbank had total assets of EUR 582.5 million (previous year: EUR 473.6 mil-lion). Total assets consist of current receivables of EUR 214.5 million (previous year: EUR 123.9 milli-on) from the settlement of payments in associ-ation with securities, which are offset by similar amounts of liabilities. The amount of these tem-porary items is determined by business volumes as at the reporting date as well as by the quality of the internal and external processes along the entire securities settlement chain.

The Bank does not conduct any active lending business. Formal lending relationships result exclusively from bank transactions pursuant to section 1 (1) sentence 2 no. 2 KWG in which instructions from the securities seller relating to the selling price are already permitted on the expected settlement date.

As at the balance sheet date, dwpbank‘s primary assets on the one hand included direct invest-

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ments in interest-bearing securities (EUR 84.6 million), which are available as collateral for the settlement of the operating activities in the se-curities business. On the other hand, cash and cash equivalents amounting to EUR 100 million were invested in a German institutional fund (Spezialfonds).

The capitalisation of internally generated soft-ware resulted in intangible fixed assets of EUR 21.9 million, reflecting the creation of additio-nal functionalities within the WP2 settlement system (previous year: EUR 17.5 million). Other assets consist primarily of tangible fixed assets (operating and office equipment), software and licences, and receivables from services billed to clients.

As at 31 December 2016, dwpbank had a surplus of deferred tax assets amounting to EUR 20.4 million. This surplus resulted from temporary differences in the measurement of balance sheet items in the tax accounts versus the financial ac-counts.

As at the date of adoption of the 2016 annual fi-nancial statements and taking into account the proposal on the appropriation of net profit, which provides for distribution of the full amount, dwpbank‘s equity amounted to EUR 171.5 mil-lion. The Bank‘s liable capital in the amount of EUR 127.6 million continues to consist solely of core (common equity tier 1) capital. The tier 1 ca-pital ratio was consistently well in excess of the minimum requirements prescribed by the regu-latory authorities.

As at the balance sheet date, the Bank reported pension obligations totalling EUR 92.6 million (previous year: EUR 83.3 million). Furthermore, current provisions and liabilities from operating activities total EUR 90.1 million (previous year: EUR 79.9 million).

dwpbank was able to meet its financial commit-ments at all times throughout the 2016 finan-cial year. Through its clearing service providers,

dwpbank has ample opportunity to refinan-ce peak volumes of securities-related payment transactions. The structure and maturity of cash and cash equivalents and payment obligations are monitored on a daily basis and managed using corresponding planning tools.

2.3.3 Summary of dwpbank‘s financial position in the 2016 financial year

Overall, the positive results forecast for the 2016 financial year were realised. Compared to the previous year, which had been marked by non-recurring market factors, the Bank‘s results of operations in 2016 were characterised by the structurally stable development of transaction volumes and increased project activities to im-plement client requirements as part of mergers and migrations.

The trends in costs in 2016 reflect the systematic continuation of activities aimed at optimising processes and expenditures. One-off expenses were incurred in connection with the implemen-tation of further personnel restructuring measures and initiatives relating to strategic business development.

Project activities focused on implementing statutory and regulatory requirements, and on the technical realisation of process and system opti-misation.

dwpbank‘s net assets and financial position were stable and balanced at all times. Business de-velopments at dwpbank in 2016 can be described as positive against the backdrop of the specified internal and external factors.



3.1.2 Changed organisation

In the course of optimising the Bank‘s business and operating model through the „dwpbank 4.0“ initiative, preparations were made to change the organisational structure with effect from 1 Jan-uary 2017. The new structure was conceived with the following objectives in mind: reduction of number of divisions in order to optimise inter-faces, definition of clear responsibilities and in-creased focus on processes by the organisation (e.g., taking into account the end-to-end process view).

3.1.3 Reconciliation of interests: dwpbank 2018

In April 2016, the „dwpbank 2018“ reconciliation of interests was resolved, which – in continuation of measures initiated in previous years – gov- erned staff reductions of 140 FTEs by 1 January 2018.

On 31 October 2016, the Board of Management and employee representatives signed a supple-ment to the 2018 reconciliation of interests, in which a further reduction of 50 FTEs was agreed.

3 STAFF AND WELFARE, RISK REPORT AND REPORT ON EXPECTED DEVELOPMENTS

3.1 Staff and welfare

3.1.1 Number of employees and staff structure

dwpbank employed 1,3191 staff at the end of 2016 (previous year: 1,350).

In December, 664 staff members worked in Frankfurt (previous year: 686), 454 in Düsseldorf (previous year: 452), 10 in Herford (previous year: 20), 185 in Munich (previous year: 186) and 6 in Troisdorf (previous year: 6). The divisional staff breakdown at the various locations throughout the Bank was as follows: 47 staff in Strategy and Corporate Management, 308 in Change, Finance and Risk Management, and 964 in Client Management and Operations. Of that head-count, 26 staff were trainees (previous year: 9).

The Bank employs 631 women and 688 men. The share of part-time employees was down some-what on the previous year at 30.1% or 397 people (previous year: 30.5%). The average age of employees was 46.6.

At the level of department heads, who report di-rectly to the Board of Management, there were

18 executives, to whom 65 team leaders were assigned as at the end of the year (including a team leader employed at dwpbank as part of a secondment from a savings bank).

In accordance with the Act on the Equal Partic- ipation of Women and Men in Leadership Po-sitions in the Private and Public Sectors (Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen in der Privat-wirtschaft und im öffentlichen Dienst), dwpbank has undertaken to achieve a target of 25% of women in department head and team leader positions by the established deadline of 30 June 2017. As at the end of 2016, 17% of department heads and 29% of team leaders were women. As part of upcoming personnel changes and changes to the organisation as at 1 January 2017, the target of 25% was achieved for the two ma-nagement levels in the first quarter of 2017. There are currently no female members of the Board of Management or the Supervisory Board. dwpbank has not undertaken to increase the proportion of female members of the Supervisory Board since it is impossible to influence this by the established deadline. dwpbank has established a figu-re of 0% for the Board of Management.

1 Excluding members of the Board of Management and inactive employees such as those on maternity or paternity leave.

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3.1.3.1 Remuneration

As a significant institution pursuant to the de-finition criteria set out in the Regulation Gover-ning Remuneration at Institutions (Instituts-Ver-gütungsverordnung – InstitutsVergV) dated 16 December 2013, dwpbank must comply with both the general and the specific requirements of the InstitutsVergV.

As in previous years, the members of the Board of Management of dwpbank as well as all de-partment heads continue to be classified as risk takers. They are subject to remuneration rules and agreements that have been in place since 2015 and which satisfy the requirements of the currently valid version of the InstitutsVergV. The variable remuneration of the risk takers is de-termined based on targets which are set each year, with corporate targets accounting for 70% and individual targets and targets relating to the specific risk taker‘s organisational unit accoun-ting for 30% of variable remuneration. These tar-gets are set for either a three-year period or for the respective financial year. In no instance does the paid variable remuneration ever exceed the fixed remuneration of the respective risk taker. If the paid variable remuneration of a risk taker exceeds the threshold of EUR 50,000 set by Ba-Fin, the variable remuneration is disbursed over several years.

In accordance with section 16 InstitutsVergV, dwpbank is required to disclose information con-cerning its remuneration policy and practices. The disclosure duties are defined for dwpbank as a CRR institution solely in accordance with Artic-le 450 of Regulation (EU) No 575/2013 (CRR). The variable remuneration of risk takers for the 2016 financial year will be disbursed after the Supervi-sory Board meeting to discuss the annual finan-cial statements, which will be held in May 2017 at the earliest. Therefore, the remuneration report („Disclosure Report“) for the remuneration paid for financial year 2016 will not be prepared until after the Supervisory Board meeting to discuss the annual financial statements, and will be pub-

lished on dwpbank‘s website. The variable remu-neration paid in 2016 for the 2015 financial year is disclosed in the Disclosure Report published for financial year 2015.

3.1.4 Human resources development

In 2016 the annual human resources develop-ment survey was once again conducted for all employees. The findings of this structured management survey into HR development requi-rements laid the groundwork for the planning and organisation of dwpbank‘s current training initiatives and for the substantive further de-velopment of the training offering.

At the same time, measures to develop executive talents were stepped up as a key focus of human resources development. As well as individual measures, the programme includes interdiscipl- inary, structural management seminars, work-shops focusing on teamwork and management culture, and team development initiatives; it will be systematically continued in 2017. In addition, the training programme for project manage-ment skills was further ramped up.

A new concept for regular employee reviews was also developed and has already been discussed with employee representatives. It is slated to be introduced in 2017.

3.1.5 Trainee programme

On 1 August 2016, a new cohort of trainees be-gan their programme at dwpbank. A total of 10 trainees at the Frankfurt, Düsseldorf and Munich offices began their practical training. The length of the trainee programme was extended from 12 to 18 months in order to offer the trainees an even broader insight into all areas of the Bank.

3.1.6 Twin-track course of study

With the pilot programme launched in 2014 for the twin-track course of study in coopera-tion with FOM Hochschule für Ökonomie &



Management continuing to enjoy success, four additional students commenced their bachelor studies on 1 August 2016. For the first time, dwp-bank is offering this form of recruitment at the Munich offices as well. A total of 10 students in the „Banking & Finance“, „Business Informatics“ and „Business Administration“ tracks are now emplo-yed at dwpbank.

3.1.7 CIC training

On 1 August 2016, three trainees working to-wards an occupational profile as an „Office Ma-nagement Assistant“ with the CIC‘s additional Banking Operations qualification began their 2-year professional education at the Düsseldorf offices. The first training course in Munich began on that same date, with two trainees embarking on a 3-year traineeship. One „Applications de-velopment IT specialist“ trainee at the Düssel-dorf offices is expected to complete his training in January 2017 and will then be hired on a tem-porary basis.

For the 2017 training year, the plan is for three trainees working towards obtaining the profes-sional profile of „Office Management Assistant“ to be hired in Düsseldorf and Munich and one „Applications development IT specialist“ trainee to be hired in Düsseldorf.

3.1.8 2016 employee survey

Before this year‘s employee survey was launched in September 2016, „Fit for the 2016 employee survey“ workshops were held in the spring with team and department heads attending. The aim was to review the measures agreed upon in 2015 for their effectiveness and to discuss current requirements of the departments. The emplo-yee survey comprised four modules: „Healthy working conditions“, „Personal development and team needs“, „Change at dwpbank“ and „Corporate governance (Board of Management

and Department heads)“. The „Healthy working conditions“ module in particular was expanded to include new questions and served as the ba-sis for conducting a risk analysis of psychologi-cal factors. The overall Bank results were ready in early December 2016 and indicated a high degree of stability in the highest approval ratings as well as an upward trend overall.

3.2 Risk report

dwpbank has initiated the measures set out in section 25a (1) of the German Banking Act (Kre-ditwesengesetz, „KWG“) and section 91 (2) of the German Stock Corporation Act (Aktiengesetz, „AktG“) requiring it to establish a risk early warn-ing system. dwpbank has suitable systems in place to manage, monitor and control risks and possesses appropriate means to determine the Bank‘s financial position at any time with suf-ficient accuracy. The existing risk management tools and risk-bearing capacity analysis methods were further refined during the year under re-view.

3.2.1 Risk strategy: the foundation for the risk management system

The risk strategy constitutes the framework for the organisation of risk management and risk reporting, under which risks are categorised and described. It defines the risk management and controlling processes, risk-bearing capacity, the allocation of risk capital and incentive systems. The further refinements in 2016 resulted pri-marily from the defined business objectives, an adjustment of tolerances as part of the annual review of the process to determine risk tolerances, and consideration of the current regula-tory requirements. The risk strategy is geared to-wards supporting the sustainable attainment of the targets formulated in the business strategy.

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Responsibility for risk management lies with the Board of Management, which established the centralised and independent risk management organisational unit. In addition, clear roles and responsibilities have been defined for its opera-tive implementation. The information security and contingency management functions have been integrated into the Risk Management de-partment. The Risk Management department sets the general conditions for a Bank-wide risk management system and develops methods and processes for measuring and controlling risks. The risk management system is adjusted on an ongoing basis in line with changing legal and regulatory requirements and using the latest scientific methods.

3.2.2 Risk management: consistent responsibility

All executives at dwpbank are responsible for identifying, reporting, controlling and managing the risks which arise in their respective areas of responsibility. Risk management officers are also appointed in each of the Bank‘s units. They ser-ve as multipliers and their knowledge and ex-perience make them a key element of operative risk management. This also includes centralised monthly reporting on indicators that is included in the Bank-wide risk report.

In addition to ad-hoc risk reports and IT disrup- tion reports, the monthly risk report regularly covers analyses from the loss database and risk indicators. In it, critical matters from the month under review are presented and causes, effects and measures are explained. Moreover, a quar-terly report on the findings of the analysis of risk-bearing capacity is also prepared.

In addition, the annual risk report also covers risk developments and measures implemented in the past year. These reports are discussed at

the monthly meetings of the Risk Committee, which all Board of Management members at-tend. Furthermore, the Supervisory Board receiv-es reports on the risk situation of dwpbank on a quarterly or ad-hoc basis, as necessary.

3.2.3 Application of the AMA to quantify operational risks

dwpbank uses an advanced measurement approach (AMA) to quantify capital requirements for operational risks. The key elements of the AMA model at dwpbank consist of an internal loss database, external risk data, risk assessments, scenario analyses and business environment and internal control factors. The internal loss database is used to capture and compile losses and has been implemented since 1 January 2004. The data is used to determine historical loss distributions. The evaluations performed using the database enable the systematic analysis of events, losses and causes and a description of the Bank‘s risk situation in addition to evidencing risk management measures.

Data on actual and expected losses from the oc-currence of events are supplemented by the find-ings of an annual risk assessment. After the risk assessment, a scenario analysis is carried out to more closely analyse serious risk scenarios and scenarios of particular Bank-wide relevance and to achieve the best possible assessment of the risk profile. The two instruments combined make it possible to analyse risks and prioritise measures on a statistical basis.

dwpbank performs special assessments during the year if it has launched new products or entered new business areas. Near-miss losses or the implementation of risk-reducing measures can also trigger a review of prior assessments.



As a component of the risk management early warning system, risk indicators guarantee early risk identification thanks to the definition of ob-jective limits. If an indicator is seen to be developing critically, monitoring is promptly increased and risk management measures are triggered. The regular monitoring of the specified indi-cators and risk scores enables the early identifi-cation of indications of pending risks. Risk indica-tor reporting is a dynamic process. Key indicator limits were updated in 2016 with the aim of in-creasing risk sensitivity, and existing indicators were reviewed and adjusted. In addition to risk indicators, dwpbank uses other ratios as part of its risk management system. These are business environment and internal control factors that are relevant to dwpbank‘s risk profile. They form a key basis of measurement for the purpose of risk assessment and scenario analysis. In addition the system of indicators includes recovery-related indicators.

The risk management framework has been published throughout the Bank in a risk manage-ment manual that is binding for all employees. The provisions set out in the manual are taken into account in the department-specific process documentation and work instructions.

The Risk Management department initiates measures aimed at promoting a healthy risk cul-ture. These include Bank-wide risk management events, loss database training and internal pub-lications.

The annual audit of dwpbank‘s risk management system forms part of Internal Audit‘s audit plan.

3.2.4 Risk categories and their significance to risk-bearing capacity

As part of the risk-bearing capacity analysis, dwpbank initially determines its risk cover as-sets using adjusted accounting figures and com-pares these to the risks seen from a liquidation approach. The analysis of risk-bearing capacity is

supplemented regularly by comparing expected losses with provisions and loss budgets and by stress tests.

The recognition of own funds as risk coverage po-tential is adjusted for intangible assets and tax effects when leveraging hidden reserves, for the outstanding replenishment amount for pension provisions and for deferred tax assets in accor-dance with HGB accounting regulations, thereby reducing the overall risk cover assets recognised. While planned or expected profits are not recognised as risk coverage potential, profits already received are recognised. As at the end of the fourth quarter of 2016, the profit received before the decision on the profit appropriation amounted to EUR 12.7 million. Together with ad-justed hidden reserves and adjusted own funds, the risk cover assets amounted to EUR 138.0 mil-lion as at 31 December 2016.

The risk cover assets are compared against the risks at dwpbank. Risk amounts are added up using a conservative approach. As at the end of 2016, operational risks, counterparty risks, market price risks and business risks produced a total risk amount of EUR 52.9 million, which utilised risk cover assets by only 38.3%. The risk cover margin or buffer amounted to EUR 85.1 million.

Operational risks are quantified at dwpbank as part of the advanced measurement approach (AMA) and incorporated into the risk-bearing ca-pacity analysis at their annual value-at-risk (VaR) in the 99.9% quantile. As at the end of 2016, the operational risk was EUR 23.5 million.

For business, counterparty and market price risks, respective plausible risk amounts are in-cluded in the risk-bearing capacity analysis on the basis of materiality assessments and scen-ario-based expert estimates in accordance with Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanage-ment, MaRisk, General Section 4.1(5)). These risk amounts are also scaled to the 99.9% quantile

31

on a yearly basis and amount to EUR 10.4 million for counterparty risk and EUR 8.5 million for mar-ket price risk. The plausible amount for business risks was EUR 31.8 million and describes the risk that realised profit will be lower than expected

Operational risks

dwpbank classifies process, employee, technolo-gy and external risks under operational risk, with explicit reference to legal risk. Operational risk re-lating to project work is referred to as project risk. At dwpbank, projects are a central component for implementing corporate strategy and busi-ness decisions. Potential risks from projects are identified and assessed indicatively as part of an established project management process. Losses incurred are entered in the internal loss database.

Business risks

dwpbank includes strategic and economic risks in business risks. Business risks manifest in net income and their effect describes the risk that actual results deviate from planned results. At the beginning of each year, the potential devia-tion from projected net income is calculated to the 99.9% quantile p.a. based on empirical ob-servations of deviations between projected and realised figures for net income for the year. This unlikely negative deviation amounted to EUR 31.8 million as at 31 December 2016. If this potential plan deviation would lead to a negative result for the year for dwpbank, the amount of the possib-le loss represents risk cover consumption in the risk-bearing capacity analysis. Based on profit

planning of EUR 21.3 million, the possible loss in this case for the 2017 financial year amounts to EUR 10.5 million.

Counterparty risks

By counterparty risks, dwpbank generally means the risk that receivables cannot be realised because obligors (counterparties) are no longer solvent or they default. dwpbank does not conduct active commercial lending business. It maintains client relationships with banks. Given this, the counterparty risk does not usually relate to the risk of loan losses.

In particular, the receivables categories in the ledger (invoices, time and sight deposits, bonds and fund units) are examined to quantify the risk amount for counterparty risk. Positions from the settlement of payments in association with se-curities for dwpbank clients (operating business) have a comparatively very small share in the risk amount. They are only relevant in certain case configurations in which dwpbank acts as a com-mission agent.

The starting point for calculating the risk amount for counterparty risks is the receivables holdings and exposures of the counterparties concerned. Probabilities of default are derived from the

profit. If these business risks occur, the risk cover consumption would amount to EUR 10.5 million in the 2017 financial year, based on budgeting as-sumptions.

Operational risks EUR 23.5 million

Business risks EUR 10.5 million

Market price risks EUR 8.5 million

Counterparty risks EUR 10.4 million

Total risks EUR 52.9 million Risk cover assets EUR 138.0 million



available rating information. Starting from the 99.9% probability level of the risk-bearing capa-city analysis, the counterparties are included in the calculation of the risk amount whose rating induces a probability of default p.a. greater than or equal to 0.1%. The necessary backing by risk co-ver assets which is expressed by the risk amount is essentially oriented towards the amount of po-tential defaults by the three counterparties with the highest default or risk amounts in the stated probability interval. Insolvency recovery rates that reduce the extent of a default are also taken into account. dwpbank may use the risk amount and the supporting analyses as impetus for risk controlling measures.

Market price risks

As dwpbank does not conduct proprietary securi-ties trading and its business model is not geared to taking market price risks (dwpbank does not have a trading book), market price risks relate pri-marily to the investment of cash and cash equiva-lents in line with the investment strategy (bonds, funds). Market price risks could primarily occur in the context of the unscheduled liquidation of holdings.

The bonds used as collateral in the securities settlement process are examined for interest rate sensitivity and a risk amount is derived using empirically observed interest rate diversification. The determination of the market price risk for the German institutional fund (Spezialfonds) man-aged by dwpbank is based on the regular repor-ting of the fund company‘s risk indicators. With regard to currency holdings, publicly available information on exchange rate fluctuations and correlations is used to derive the risk amount. The analyses of market price risk can serve as impetus for risk controlling measures, such as in terms of investor conduct or process design.

Liquidity risks

In accordance with GS 4.1(4) MaRisk, liquidity risks are not included in the risk-bearing capaci-ty analysis at dwpbank as they cannot generally be reasonably limited or covered by risk coverage potential such as capital.

dwpbank has only limited exposure to liquidity risk as, in line with its business model, it is not subject to call risk due to unexpected payment obligations. Payment claims and obligations in respect of clients resulting from securities pro-cessing and financial brokerage operations are usually offset by obligations and claims payable on demand in the same amount. Liquidity plan-ning instruments with different time-frames en-sure that dwpbank is able to meet its payment obligations at all times.

The liquidity ratio in accordance with the Ger-man Liquidity Regulation (Liquiditätsverord-nung) (as at 31 December 2016: 4.31) and the liquidity cover ratio (LCR) (as at 31 December 2016: 5,092.20%) are integrated into dwpbank‘s monthly risk report as risk indicators and subject to internal floors. The ratios were clearly and sta-bly above the limits throughout 2016. In addition, dwpbank monitors compliance with risk toleran-ce thresholds and liquidity reserves and the oc-currence of possible liquidity shortages.

3.2.5 Outsourcing and risk communication

The value chains in industrial banking are characterised by outsourcing chains. In the case of securities transactions, outsourcing relationships exist between clients and dwpbank as well as between dwpbank and its providers.

In addition to competitive, cost and quality benefits, outsourcing also results in a trans-

33

fer the risk outsourced. While a bank itself was exposed to the operational risks of settlement before outsourcing, it outsources these risks to the insourcer. A new factor is the risk emerging from the outsourcing relationship, referred to as the outsourcing risk. MaRisk requires this outsourcing risk to be managed, monitored and controlled. The risk management and controlling processes must guarantee that the material risks – including those of outsourced activities and processes – are detected early on, tracked in full and can be appropriately presented. The role of the insourcer is to manage, monitor and control its own risk. This is done based on its risk preference and business considerations.

For all outsourcing activities, the service and quality standards agreed with the client for the outsourced processes and activities must be ob-served in accordance with the respective service level agreements.

dwpbank has adopted an internal policy on outsourcing dwpbank services within the meaning of section 25b KWG. It provides regulations for specific activities and duties with regard to outsourcing relationships and measures for uni-form provider management.

In line with the requirements of MaRisk (GS 9(2)), dwpbank has established a uniform risk analysis for determining the materiality of outsourcing. The relevant organisational units are included in the preparation of this risk analysis, as is Internal Audit within the scope of its responsibility.

All outsourced dwpbank operations are map-ped, including data centre services in particular. These outsourcing relationships are assigned to outsourcing officers who ensure the manage-ment, monitoring and controlling of the contractual performance and reporting. They report

annually on compliance with the requirements set forth under section 25b KWG and GS 9(5) MaRisk by way of an updated risk analysis. Ba-sed on these updates, Central Risk Management prepares a summary outsourcing report for the Board of Management. The objective of this outsourcing report is to provide an overview of relevant insourcer information against the back-drop of applicable legal requirements so as to assess the quality of the relationship and the outsourcing risk to which dwpbank is exposed. Outsourcing relationships are taken into account in the risk management system of dwpbank, particularly when quantifying operational risks using the AMA.

dwpbank provides its clients with extensive outsourcing and risk information during the year. dwpbank bundles this information in an annual outsourcing and risk report, which is made available to clients. An electronic version is also avai-lable on dwpbank‘s extranet. This documentation facilitates information research and assists clients in the provider management. The report and its content are updated each year and de-veloped further. The outsourcing and risk report is complemented in electronic form by quarterly information on the risk map and on outsourcing management.

3.2.6 Continuous action management

Action management enjoys a high priority at dwpbank and primarily represents the risk con-trol and monitoring functions based on the iden-tification, evaluation and communication of risks within the risk management cycle. Action management consists of a number of risk manage-ment instruments and reports. Risk mitigation and risk transfer are the main options for con-trolling risks. Risk reduction activities were also implemented in 2016.



In dwpbank‘s advanced risk management sys-tem, operational risks are systematically measured in order to ensure that they can be objecti-vely compared and controlled, particularly on the basis of value-at-risk (VaR).

Significant risks are generally countered through avoidance or measures to mitigate or transfer risks. Business aspects, such as the cost of risk mitigation or transfer and the earnings contri-butions of the divisions affected, are taken into account.

Stimuli for risk controlling activities are also de-rived from the comparison of risk amounts and the risk cover assets.

Based on the results of risk analyses, the available options for risk avoidance, mitigation, trans-fer and acceptance are discussed at the meetings of the Risk Committee.

Changes in the risk situation are monitored within the risk management system. Follow-up processes have been established for critical changes in the risk situation, risk events involving significant losses and ad hoc risk reports.

dwpbank has also taken out insurance for opera-tional risks as an instrument for risk mitigation and transfer in addition to establishing business continuity planning that allows an appropriate response to disruptions in business processes at all times.

3.2.7 Trend development and forecast

The number of risk events reported in 2016 was slightly above the low level of the past two years. Statistically, there is a highly positive cor-relation between the number of settlements and transactions and the number of risk events reported in a year.

By contrast, there is no statistical correlation between the number of events reported annual-ly and the annual loss total. As is typical for operational risks, annual loss totals are characterised not by the frequency of losses but rather by un-systematic occurrences of large losses. The total of realised losses for 2016 was below average.

Indicators for Production revealed a positive overall situation in 2016. An analysis of these indicators does not indicate any systemic weak-nesses. For the most part, these are dealt with as soon as possible.

In the autumn and winter months, the number of sick days taken was significantly higher; the number was virtually at the same high level as in the previous year.

The liquidity ratio and liquidity coverage ratio (LCR) were at a high level in 2016; the total ratio (as at 31 December 2016: 33.10%) was roughly at the same level as in the previous year.

At the Client Support Centre, availability was up year on year. The overall number of tickets issued in 2016 rose slightly as against the previous year. While the number of internal tickets declined slightly, tickets from clients saw a significant increase due to the consolidation of client entry channels.

WP2 system availability remained virtually con-stant year on year and the risk indicator „online availability of WP2“ was constantly at 100%. The systems availability indicators for WPDirect and WPIO were at the same high level of the prior- year figures, at 99.78% and 99.91% respectively. The number of highly critical IT disruptions was once again extremely low. The high degree of overall system availability for the WP2 systems family in 2012, 2014 and 2015 was maintained in 2016 with respect to disruptions which affected clients.

35

Over the course of the year, the provider manage-ment indicators remained at a good level.

Security issues (IT security indicator) primarily re-sulted from security breaches that were discover-ed in the form of bugs in software and external attacks. There are no expectations that the num-ber of security issues will decrease.

The contingency management risk indicators were at a non-critical level, roughly unchanged year on year.

These effects are also reflected in the evaluation of the risk assessments and scenario analyses. As a consequence of the ongoing work to calibrate the AMA model to remedy an audit finding pur-suant to section 44 KWG, the risk capital require-ment for operational risks is expected to increase sharply in 2017.

3.3 Outlook and report on opportunities

3.3.1 The financial markets are seeing positive economic outlooks mixed with political uncertainties

In light of the upcoming elections, 2017 is going to be a highly politicised year in the eurozone. In the first half of the year, elections will be held

in the Netherlands, France and possibly also in Italy. Depending on the outcome of those elec-tions, certain market observers do not rule out turbulent times for Europe‘s financial markets. The launch of the Brexit negotiations could also exacerbate the situation on the financial mar-kets. In addition, parliamentary elections will be held in Germany in September, although market observers do not anticipate any negative implica-tions for the markets.

Regardless of the general political environment, economists and market observers continue to expect a high degree of economic momentum in the euro area. Forecasts are calling for economic growth of between 1.3% and 1.5%. Economists also expect the global economy to continue ex-periencing strong growth in 2017, with the IMF forecasting growth rates around the 3.4% mark.

Economists believe that Germany‘s strong eco-nomic position will not change significantly in 2017. Accordingly, unemployment will continue to decline and consumption will remain the key growth driver. This economic momentum is also expected to cause consumer prices to increase further. According to the Bundesbank, the rate of inflation will increase from the 2016 average of 0.6% to 1.4%. Current economic forecasts are calling for 2017 GDP growth to fall from appro-ximately 1.9% in 2016 to between 1.5% and 1.7%.



A relatively high number of public holidays will fall on working days in 2017; adjusted for this, GDP is expected to increase by approximately 2%.

Share prices on the German equities market ex-perienced a significant upturn at the end of 2016, although dwpbank believes there is still some potential upside for 2017. The companies‘ profit outlooks continue to be positive, with the ECB‘s expansionary monetary policy continuing to give rise to demand for investments that prom- ise returns. This contrasts with political risks and the economic risks associated with them, which could keep volatility high on the equities market in 2017.

As an infrastructure services provider in the secu-rities services sector, dwpbank‘s outlook remains positive. The expected volatility on the stock mar-kets and a slight increase in the savings ratio are generally seen to have a positive influence on transaction behaviour among securities clients. On the other hand, dwpbank does not expect any lasting change in German investing habits. In summary, dwpbank expects its clients‘ transac-tion and securities account numbers to remain stable year on year in 2017.

3.3.2 dwpbank‘s continued transformation into the leading infrastructure services provider in the securities services sector

In 2016, dwpbank continued to focus closely on effectiveness and efficiency. Its business strategy is shaped by the objectives set out in dwpbank‘s 2021 initiative. dwpbank‘s mission is to become the leading infrastructure services provider in the German securities services sector offering a comprehensive portfolio of services and highly standardised, automated process chains. Ope-rational and IT units need to be able to react at short notice to market opportunities, client re-quirements and regulatory changes.

In order to achieve this objective, the Bank is sys-tematically pushing forward with implementing the activities under the „dwpbank 4.0“ initiative aimed at realising sustainable process and cost optimisation, further developing the business model and expanding digital services. We aim to systematically leverage currently existing oppor-tunities to expand our market position.

3.3.3 Regulatory conditions affecting dwpbank‘s line of business

Expanded regulatory and market infrastruc-ture-driven requirements will continue to affect dwpbank‘s business in 2017 and 2018. Some of those requirements, for which preparations were made in 2016 and earlier years, will be implemen-ted in 2017 or early 2018.

As part of the fourth wave of migration, the Ger-man market will be included in the integrated European securities settlement platform, TAR-GET2-Securities (T2S), with operations on T2S go-ing live on 6 February 2017. dwpbank will assist in the migration process and the necessary fol-low-up work after the launch; in addition, it will implement the associated new functions on the money and securities side of the securities busi-ness. In this way, dwpbank facilitates its clients‘ transition to the uniform European post-trade infrastructure.

At the beginning of 2018, the new and expanded requirements of the EU financial markets legis-lation (MiFID II and MiFIR) will enter into force and become applicable. 2017 will see continued preparations for this. dwpbank‘s activities in this connection will revolve around consultations with clients and industry associations, the de-velopment of detailed concepts, implementation and testing so as to ensure that dwpbank satis-fies its own obligations and offers its clients com-prehensive services to assist them in complying with their statutory obligations.

37

Furthermore, dwpbank will continue its activities to support and comply with client requirements in its role as a custodian, particularly in connec-tion with the selection and monitoring of depo-sitories.

By bundling the implementation of regulatory and market requirements, dwpbank is fulfilling its mission as an infrastructure services provider. At the same time, this provides dwpbank with the opportunity to increase client loyalty and to attract additional clients using dwpbank‘s ser-vices. The use of these advantages from bundling plays a systematic role in the business strategy.

3.3.4 Opportunities for dwpbank‘s long-term economic development

The quantitative development of the securi-ties market will remain a key factor influencing dwpbank‘s economic development. In the coming years, dwpbank expects that both the number of transactions to be processed and the securities accounts to be managed will remain stable at the level of the previous financial year.

Despite the fact that no positive market momen-tum is expected, dwpbank sees considerable po-tential to sustainably increase its earnings in the years to come. The activities needed to enhance the efficiency of workflows and to realise additional income potential are being implemented as part of the „dwpbank 4.0“ initiative.

dwpbank believes that there is additional income potential particularly through attracting new clients in the savings banks sector, expan-ding the back-office business and increasing the number of institutional services and cross-sel-ling activities offered.

On the cost side, the systematic implementa-tion of staff restructuring measures set out in the „dwpbank 2018“ partial reconciliation of in-terests will have a lasting positive effect. Further cost savings will be achieved through end-to-end process optimisation, streamlined change pro-cesses and efficiency enhancements within the corporate functions and facility management.

In order to secure a viable, state-of-the-art, effi-cient and scalable securities settlement platform, dwpbank will realise a new target IT landscape. The added value from investments funded by the Bank itself will be realised in particular by secur- ing the WP2 system as a powerful IT platform. Doing so will satisfy the technical requirements both for the necessary reduction in costs as well as the long-term development capability of the IT systems. The aim is for the further techni-cal development of the settlement systems to be achieved in several stages, with the core advances being realised by the end of 2021.

In the view of the Board of Management, the developments of the past financial year have underscored the necessity of the Bank‘s strategic trajectory. A sharper client focus in connection with the targeted further development of the business model places dwpbank in a position to sustainably generate positive economic re-sults. dwpbank expects its economic result to increase significantly in 2017. This positive trend will depend on the measures under the staff restructuring programme being realised and the full recognition of the necessary costs to achieve this in the current reporting year.


dwpbank Geschäftsbericht 201638

39

Deutsche WertpapierService Bank AG2016 ANNUAL FINANCIAL STATEMENTS

40-41 Balance sheet

42-43 Income statement

44-55 Notes to the annual financial statements

56 Country-by-country reporting 2016

57 Audit opinion

58-59 Report of the Supervisory Board

60 Members of the Advisory Board


BALANCE SHEETas at 31 December 2016

Assets EUR31 Dec. 2016

EUR31 Dec. 2015

EUR thousand

1. Cash

a) Cash in hand 5,423.39 5

b) Central bank balances of which: with Deutsche Bundesbank EUR 36.96 (previous year: EUR 0 thousand) 36.96 0

5,460.35

2. Loans and advances to other banks

a) Payable on demand 289,964,841.69 207,734

289,964,841.69

3. Loans and advances to clients 7,340,754.28 1,715

4. Bonds and other fixed-income securities

a) Bonds and notes

aa) Of public-sector issuers, of which: eligible at Deutsche Bundesbank EUR 84,630,632.77 (previous year: EUR 85,829 thousand) 84,630,632.77 85,829

5. Equities and other non-fixed-income securities 99,999,930.27 100,000

6. Equity investments 320,000.00 320

7. Shares in affiliated companies 112,831.54 113

8. Trust assets of which fiduciary loans: EUR 0.00 13,567,960.40 2,510

9. Intangible fixed assets

a) Internally generated industrial and similar rights and assets 21,934,559.37 17,480

b) Purchased concessions, industrial and similar rights and assets and licences in such rights and assets 1,348,160.00 1,977

23,282,719.37

10. Tangible fixed assets 7,877,693.00 8,801

11. Other assets 22,178,657.84 21,072

12. Prepaid expenses 5,815,670.67 3,389

13. Deferred tax assets 27,396,016.00 22,670

Total assets 582,493,168.18 473,614

41

Equity and liabilities EUR31 Dec. 2016

EUR31 Dec. 2015

EUR thousand

1. Liabilities to other banks

a) Payable on demand 193,506,859.35 112,979

193,506,859.35

2. Liabilities to clients

a) Other

aa) Payable on demand 31,790.24 302

31,790.24

3. Trust liabilities of which fiduciary loans: EUR 0.00 13,567,960.40 2,510

4. Other liabilities 17,139,162.47 17,135

5. Deferred income 1,046,777.48 1,757

5a. Deferred tax liabilities 6,981,880.34 5,564

6. Provisions

a) Provisions for pensions and similar obligations 92,598,608.00 83,282

b) Provisions for taxes 850,058.27 5,074

c) Other provisions 76,582,288.18 62,547

170,030,954.45

7. Equity

a) Subscribed capital 20,000,000.00 20,000

b) Capital reserves 108,416,625.67 108,417

c) Revenue reserves

ca) Legal reserves 2,000,000.00 2,000

cb) Other revenue reserves 41,046,412.89 40,918

d) Net retained profits 8,724,744.89 11,128

180,187,783.45

Total equity and liabilities 582,493,168.18 473,614



INCOME STATEMENT for the period from 1 January2016 to 31 December 2016

EUR EUR2016

EUR2015

EUR thousand

1. Interest income from

a) Lending and money market transactions 1,350,922.84 1,051

b) Fixed-income securities and debt register claims 2,254,055.98 3,604,978.82 2,423

2. Interest expense -1,318,406.37 -904

2,286,572.45 2,570

3. Current income from

a) Equities and other non- fixed-income securities

162,771.59 611

b) Equity investments 40,463.70 20

c) Shares in affiliated companies 144,424.18 0

347,659.47 631

4. Fee and commission income 761,661,924.28 801,503

5. Fee and commission expense -539,555,103.26 -569,939

222,106,821.02 231,563

6. Other operating income 50,786,795.78 43,168

7. General and administrative expenses

a) Personnel expenses

aa) Wages and salaries -93,033,000.09 -100,811

ab) Social security, post-employment and other employee benefit costs, of which:

in respect of old-age pensions EUR 5,696,578.29 (previous year: EUR 4,469 thousand) -18,796,038.62 -18,572

-111,829,038.71 -119,384

b) Other administrative expenses -96,339,862.32 -87,726

-208,168,901.03 -207,109

43

EUR EUR2016

EUR2015

EUR thousand

8. Amortisation and write- downs of intangible fixed assets and depreciation and write-downs of tangible fixed assets -6,871,345.57 -5,475

9. Other operating expenses of which: interest on longer-term provisions: EUR 1,874,772.47 -46,458,754.06 -46,451

10. Write-downs of and allowances on loans and advances and certain securities and additions to provisions for credit risks -1,339,917.73 -1,531

11. Income from reversals of write-downs of loans and advances and certain securities and reversals of provisions for credit risks 59,675.50 2

12. Result from ordinary activities

12,748,605.83 17,368

13. Taxes on income

a) Current taxes on income -7,332,267.54 -8,963

b) Deferred taxes 3,308,406.60 2,723

-4,023,860.94 -6,240

14. Net income for the financial year

8,724,744.89 11,128

15. Net retained profits 8,724,744.89 11,128



NOTES TO THE ANNUAL FINANCIAL STATEMENTS

General information

The annual financial statements of dwpbank AG for the 2016 financial year were prepared in accordance with the provisions of the German Commercial Code (Handelsgesetzbuch, „HGB“), including sections 340 et seq. in particular, and the German Regulation on Accounting by Banks (Kreditinstituts-Rechnungslegungsverordnung, „RechKredV“).

I. Accounting policies

Assets and liabilities have been accounted for in accordance with German generally accepted accounting principles as set out in sections 252 et seq. HGB unless dictated otherwise by the special provisions of sections 340 et seq. HGB. The provisions of the RechKredV were observed.

In accordance with section 286 (3) sentence 1 HGB, the information on subsidiaries pursuant to section 285 no.11 HGB has not been disclosed.

The individual assets were measured conserv- atively. Loans and advances to other banks and to clients were measured at their principal amounts. Liabilities are carried at their settle-ment amounts.

Receivables and liabilities from the performance of payments in association with securities were recognised by the Bank as trust assets and trust liabilities respectively, provided the appropriate contractual bases exist.

Bonds held in the proprietary portfolio are al-located to the liquidity reserve and are measured using the strict lower of cost or market principle. Non-fixed-income securities allocated to the in-vestment portfolio are recognised in accordance

with the less strict lower of cost or market prin-ciple. Equity investments and shares in affiliated companies are carried at cost less write-downs.

Finite-lived items of tangible fixed assets are car-ried at cost and reduced by depreciation reflec-ting their expected useful lives. These useful lives are generally based on the depreciation tables published by the tax authorities. Low-value as-sets are treated in accordance with the relevant tax provisions.

The bank has exercised the option provided un-der section 248 (2) HGB to capitalise internally generated intangible assets.

Provisions were recognised at their settlement amount; longer-term provisions were discounted accordingly.

Pension and early retirement provisions were cal-culated in line with actuarial principles, applying the projected unit credit method. The settlement amount was calculated using the 2005 G Heu-beck mortality tables and a matched-term interest rate of 4.01%. Furthermore, wage and salary increases of 2.50% and a pension trend of 1.5% to 2.00% were assumed. Other provisions take into account all identifiable risks and uncertain obli-gations as at 31 December 2016.

In accordance with section 246 (2) HGB, the Bank offset assets and liabilities to the necessary ex-tent.

These relate to the provisions for partial retire-ment and the corresponding plan assets.

Foreign currency receivables and liabilities were translated at the ECB reference rates of 31 Decem-ber 2016 in accordance with section 340h HGB.

45

The Bank presents deferred tax assets and liabilities separately under assets and under liabilities (section 274 (1) HGB). Deferred taxes were calculated using tax rates of 15.83% for the tax loss carryforward and 31.83% for differences in balance sheet line items.

The proposal for the appropriation of profits was prepared taking into account the restrictions on distribution set out in section 253 (6) and section 268 (8) HGB.

II. Notes to the balance sheet

1. Loans and advances to other banks

The carrying amount (EUR 289,965 thousand) re-lates exclusively to loans and advances payable on demand (previous year: EUR 207,734 thous-and). Of this amount, EUR 195,792 thousand is attributable to the Bank‘s operating activities in the securities business.

Loans and advances include foreign currency amounts of EUR 38,908 thousand (previous year: EUR 11,335 thousand). Loans and advances to banks in which dwpbank holds an equity investment totalled EUR 123,414 thousand (previous year: EUR 157,476 thousand). 2. Loans and advances to clients

Of the EUR 7,341 thousand in loans and advances to clients (previous year: EUR 1,715 thousand), EUR 3,295 thousand related to outstanding invoices as at the balance sheet date. This includes loans and advances to affiliated companies of EUR 15 thousand (previous year: EUR 27 thousand). EUR 4,046 thousand is attributable to the Bank‘s operating activities in the securities business. The loans and advances in this item denominated in a foreign currency amount to EUR 2,154 thousand (previous year: EUR 42 thousand).

3. Bonds and notes

This item consists entirely of fixed-income, listed securities. These relate primarily to bonds issued by the Federal Republic of Germany. These securi-ties are allocated to the liquidity reserve.

Bonds and notes serve as collateral for dwpbank‘s participation in Xetra trading as a CCP of EUREX Clearing AG and in trading on the Frankfurt Stock Exchange, as well as to se-cure the domestic transactions settled via the regional Bundesbank office (Landeszentralbank) account. They are deposited in a pledged secu-rities account with Clearstream. A nominal EUR 6,620 thousand of the securities reported as part of this item matures in 2017.

4. Equities and other non-fixed-income securities

The carrying amount of this item relates to the unlisted units of a German institutional fund (Spezialfonds) launched for dwpbank AG. The fund serves to generate returns in excess of the money market interest rate and can be liqui-dated at short notice. It is carried at EUR 4,037 thousand below market value, which was EUR 104,037 thousand as at the end of the year.

As at year-end, the fund predominantly contains highly rated securities issued by euro area govern- ments and German and European institutions.

5. Equity investments

dwpbank holds a 26% interest in CINTAC A/S, Roskilde, Denmark, which it carries at a value of EUR 320 thousand. The shares are not listed. The company‘s share capital amounts to DKK 567 thou-sand (EUR 76 thousand); in the last full fi-nancial year (2015), profit of DKK 1,164 thousand (EUR 157 thousand) was generated. The company expects to generate a profit of DKK 700 thou-sand (EUR 94 thousand) for 2016.



6. Shares in affiliated companies

dwpbank holds a 100% interest in dwp Software Kft., Budapest, carried at the original cost of EUR 113 thousand. The shares are not listed. In ac-cordance with section 290 (5) HGB, consolidated financial statements were not prepared since the

subsidiary need not be included in consolidated financial statements on account of it being insig-nificant in accordance with section 296 (2) HGB.

The long-term financial assets described in items 4 to 6 developed as follows in the year under re-view.

EUR thousand

Equities and other non-fixed-income

securitiesEquity

investmentsShares in affiliated

companies

Historical cost 100,000 320 113

Additions in the financial year 0 0 0

Disposals in the financial year 0 0 0

Depreciation, amortisation and write-downs on disposal

0 0 0

Depreciation, amortisation and write-downs (cumulative)

0 0 0

Carrying amount at 31 Dec. 2016 100,000 320 113

Carrying amount at 31 Dec. 2015 100,000 320 113

Depreciation, amortisation and write-downs in the financial year

0 0 0

47

7. Trust assets

The trust assets reported separately here relate entirely to loans and advances to other banks resulting from payments associated with securi-ties settlement. This item is offset by trust liabili-ties to other banks in the same amount.

8. Intangible fixed assets

This item consists primarily of software de-veloped internally by the Bank. The Bank iden-tified EUR 9,073 thousand of its project work as eligible for capitalisation in the financial year and recognised this amount as internally generated intangible assets.

Purchased intangible assets relate exclusively to software. Software is carried at cost less amorti-sation. The amortisation period is four years.

9. Tangible fixed assets

Tangible fixed assets relate primarily to finite- lived assets (operating and office equipment). The useful life of a tangible fixed asset takes account of the asset‘s physical life, technical ob-solescence and contractual and statutory restric-tions.

Changes in fixed assets are presented in the statement of changes in fixed assets.

EUR thousandIntangible

fixed assetsTangible

fixed assets

Historical cost 127,204 25,273

Additions in the financial year 9,437 452

Disposals in the financial year 1,070 708

Depreciation, amortisation and write-downs on disposal 973 690

Depreciation, amortisation and write-downs (cumulative) 112,288 17,139

Carrying amount at 31 Dec. 2016 23,283 7,878

Carrying amount at 31 Dec. 2015 19,457 8,801

Depreciation, amortisation and write-downs in the financial year 5,514 1,357



10. Other assets

The carrying amount of EUR 22,179 thousand (previous year: EUR 21,072 thousand) includes loans and advances from the Bank‘s operating activities in the securities business in the amount of EUR 738 thousand.

The Bank also has receivables from tax prepay-ments and credits in the amount of EUR 100 thousand (previous year: EUR 248 thousand) and from VAT transfers for the years 2004 to 2010 amounting to EUR 9,663 thousand. Subject to a binding ruling by the tax authorities concerning the treatment of VAT on individual settlement products offered by the former TxB, dwpbank has a claim to the reimbursement of VAT from cer-tain portions of its clients.

In addition, the receivables item also includes EUR 4,887 thousand in receivables from de-positary fees not yet charged on to clients for December 2016 and EUR 4,416 thousand in ad-vance salary payments for January 2017.

The reinsurance claims from insolvency insurance for partial retirement obligations reported were offset against the corresponding provisions for partial retirement in accordance with section 246 (2) HGB. The amount of cover assets as at 31 December 2016 was EUR 713 thousand.

Other assets contains EUR 41 thousand in items denominated in foreign currencies.

11. Prepaid expenses

This item includes prepaid advance payments by dwpbank only.

12. Deferred tax assets

Deferred tax assets amounting to EUR 27,396 thousand resulted solely from differences in the measurement of balance sheet items in the tax accounts and in the financial accounts. This relates primarily to the Spezialfonds (tax recognition of retained income) and the difference in the recognition of individual provisions under tax law, in particular pension and restructuring provisions. A further EUR 6,750 thousand results pro rata from the effects in income of 2016.

13. Liabilities to other banks

The EUR 193,507 thousand in liabilities payable on demand (previous year: EUR 112,979 thou-sand) resulted exclusively from the Bank‘s oper-ating activities in the securities business and in-cluded EUR 40,753 thousand (previous year: EUR 11,736 thousand) denominated in foreign curren-cy. Liabilities to banks in which dwpbank holds an equity interest totalled EUR 62,770 thousand (previous year: EUR 1,728 thousand).

14. Liabilities to clients

Liabilities to non-banks amounted to EUR 32 thousand (previous year: EUR 302 thousand);

49

these related almost exclusively to liabilities from the Bank‘s operating activities in the securi-ties business and are denominated in EUR. 15. Other liabilities

The carrying amount of EUR 17,139 thousand (previous year: EUR 17,135 thousand) includes li-abilities from the Bank‘s operating activities in the securities business amounting to EUR 4,470 thousand (previous year: EUR 4,790 thousand). This item also includes trade payables of EUR 6,897 thousand (previous year: EUR 8,015 thou-sand) and outstanding VAT amounting to EUR 2,160 thousand (previous year: EUR 1,481 thou-sand). Other liabilities includes items denomi-nated in foreign currencies amounting to EUR 9 thousand. Liabilities to banks in which dwpbank holds an equity investment totalled EUR 473 thousand (previous year: EUR 135 thousand).

16. Deferred income

Deferred income includes primarily EUR 733 thousand resulting from a rent subsidy collected in 2006. This will be reversed pro rata temporis over the entire term of the lease until 2017.

17. Deferred tax liabilities

All of the deferred tax liabilities (EUR 6,982 thousand) relate to the capitalisation of internal-ly generated intangible fixed assets. In 2016, de-ferred tax liabilities were increased by EUR 1,418 thousand through profit or loss.

18. Provisions

Provisions totalled EUR 170,031 thousand as at 31 December 2016 (previous year: EUR 150,902 thousand).

EUR thousand 31 Dec. 2016 31 Dec. 2015

Provisions for pensions 92,599 83,282

Other employee-related provisions 25,054 24,985

Restructuring provisions 30,382 14,771

Holiday leave and flexitime 2,310 2,136

Other provisions 19,686 25,728



Prior to 2015, the Bank reduced the pension pro-vision shortage resulting from the first-time ap-plication of the German Accounting Law Mod- ernisation Act (Bilanzrechtsmodernisierungsge-setz, „BilMoG“) by one fifteenth each year. During the year under review, the remaining EUR 7,990 thousand which had not previously been recog-nised was recognised in full. This has eliminated the pension provision shortage. The difference in accordance with section 253 (6) HGB amounts to EUR 14,996 thousand.

Under other employee-related provisions, the pro-vision for partial retirement was offset against the corresponding plan assets of EUR 713 thousand in accordance with section 246 (2) HGB.

Other provisions include provisions for outstanding invoices in the Bank‘s operating activities in the securities business, including the settlement of interest and fees (EUR 5,724 thousand), provi-sions for IT and consulting expenses (EUR 1,807 thousand) and other administrative expenses (EUR 9,734 thousand). Provisions for potential losses total EUR 1,574 thousand.

19. Equity

Subscribed capital relates exclusively to dwpbank‘s subscribed capital of EUR 20,000,000, which is divided into 20,000,000 registered voting shares with restricted transferability. The share capital is fully paid in as follows: DZ BANK 50.00%; Sparkassenverband Westfalen-Lippe 20.00%; Rheinischer Sparkassen- und Girover-band 20.00%; BayernLB 3.74501%; Landesbank Hessen-Thüringen 3.74499%; HSH Nordbank 2.51%. The Bank did not hold any treasury shares.

In the financial year, EUR 128 thousand was trans-ferred from the net retained profits of the previ-ous year to other revenue reserves.

III. Notes to the income statement

1. Interest income

Interest income from lending and money market transactions amounting to EUR 1,348 thousand (previous year: EUR 1,029 thousand) relates to the operating activities in the securities business and results from interest on the balances of clients‘ current accounts used for this purpose, deposito-ries and payment service providers.

Interest from fixed-income securities results from the securities deposited as collateral.

2. Interest expense

Interest expenses relate exclusively to EUR 1,318 thousand in current account interest (previous year: EUR 904 thousand) on accounts used in the operating activities of the securities business.

3. Current income

Current income from equities and other non- fixed-income securities results primarily from a dividend received from the Düsseldorf Stock Exchange. Income from equity investments con-sisted exclusively of the dividend from CINTAC A/S, and the income from affiliated companies consisted exclusively of the dividend from dwp Software Kft.

4. Fee and commission income

Fee and commission income amounted to EUR 761,662 thousand (previous year: EUR 801,503 thousand), with EUR 222,884 thousand (previous year: EUR 233,148 thousand) of that amount re-sulting from full-service securities services. This item also includes sales commission income of EUR 467,586 thousand (previous year: EUR 496,751

thousand), which is offset by corresponding fee and commission expenses. A further EUR 55,574 thousand (previous year: EUR 53,261 thousand) in income resulted from depositories‘ transaction and account fees passed on to clients, and EUR 13,629 thousand (previous year: EUR 17,147 thou-sand) related to brokerage fees and expenses. 5. Fee and commission expense

Fee and commission expenses amounted to EUR 539,555 thousand (previous year: EUR 569,939 thousand) and can be broken down as follows:

EUR thousand 2016 2015

Sales commissions paid 467,586 496,790

Securities account and transaction fees 56,976 54,992

Other fee and commission expense 14,993 17,801

Other fee and commission expense relates pri-marily to brokerage fees and expenses of EUR 11,541 thousand (previous year: EUR 14,456 thou-sand).

6. Other operating income

Other operating income of EUR 50,787 thousand (previous year: EUR 43,168 thousand) can be bro-ken down as follows:

EUR thousand 2016 2015

IT services (incl. migrations) 30,154 22,763

Foreign exchange result 6,968 7,288

Reversal of provisions 3,981 4,122

Miscellaneous other operating income 9,684 8,995

51MANAGEMENT REPORT General information I Economic report I Staff and welfare, risk report and report on expected developmentsANNUAL FINANCIAL STATEMENTS Balance sheet I Income statement I Notes to the annual financial statements


Miscellaneous other operating income includes rent income in the amount of EUR 1,448 thou-sand and income from discounts in the amount of EUR 1,332 thousand. A further EUR 1,643 thou-sand in income resulted from a VAT matter which was attributable in part to the previous year. The remaining miscellaneous other operating income essentially results from the invoicing of services. In accordance with section 246 (2) HGB, income of EUR 12 thousand was offset against other operating expenses. 7. Other administrative expenses

Other administrative expenses totalling EUR 96,340 thousand (previous year: EUR 87,726 thousand) related to IT operation and develop-ment expenses in the amount of EUR 43,232 thousand (previous year: EUR 42,621 thousand). Consulting fees in the amount of EUR 22,369 thousand (previous year: EUR 14,348 thousand) and building management expenses in the amount of EUR 13,609 thousand (previous year: EUR 13,730 thousand) were also incurred in the reporting period. Further components of this item include expenses relating to information gathering (market data services), which amount-ed to EUR 6,654 thousand (previous year: EUR 5,786 thousand), and other personnel expenses and non-labour costs relating to personnel, which amounted to EUR 6,374 thousand (previ-ous year: EUR 6,883 thousand).

8. Other operating expenses

Other operating expenses amounted to EUR 46,459 thousand (previous year: EUR 46,451 thousand). A majority of the expenses amount-ing to EUR 21,846 thousand were attributable to newly resolved restructuring measures resulting in an addition to previously recognised provisions. Furthermore, this item includes non-de-

ductible input tax of EUR 8,183 thousand (pre-vious year: EUR 8,123 thousand) and the effect from the reversal of discounting on longer-term personnel provisions amounting to EUR 1,875 thousand (previous year: EUR 14,701 thousand). The decrease in the interest-related additions to personnel provisions is due to the statutory ch-ange in the discount rate.

In accordance with section 246 (2) HGB, expenses of EUR 12 thousand were offset against other operating income.

9. Write-downs of and allowances on loans and advances and certain securities and additions to provisions for credit risks

The expenses reported under this item relate exclusively to write-downs of securities held in the liquidity reserve, where such write-downs were recognised in accordance with the strict lower of cost or market principle.

10. Income from reversals of write-downs of loans and advances and certain securities and reversals of provisions for credit risks

The income reported under this item relates exclusively to reversals of securities held in the liquidity reserve, where such reversals were recognised in accordance with the strict lower of cost or market principle.

11. Taxes on income

EUR 6,573 thousand of reported current taxes re-lated to the result from ordinary activities of the past financial year. A further EUR 759 thousand resulted from the payment of tax arrears for pre-vious years.

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Total income of EUR 3,308 thousand (previous year: EUR 2,723 thousand) resulted from deferred taxes.

12. Return on capital

The return on capital, which under section 26a of the German Banking Act (Kreditwesengesetz, „KWG“) is calculated as net income for the fi-nancial year divided by total assets, amounted to 1.50%. The meaningfulness of the return on capital is limited since dwpbank‘s total assets are heavily dependent on the volume of settled securities transactions and thus cannot be acti-vely controlled by the Bank.

IV. Report on post-balance sheet date events

No significant events or transactions occurred after the balance sheet date.

V. Other disclosures

1. Employees

The average number of people employed by the Bank (full-time equivalents) in the financial year was 1,326. Of that number, 927 were employed full-time and 399 part-time. On 31 December 2016, the Bank had 1,319 active employees, of which 922 were full-time and 397 part-time. Ad-ditionally, the Bank employed three members of the Board of Management as at 31 December 2016, as well as 24 inactive employees.

2. Total remuneration of executive bodies and recognised provisions for pensions

The total remuneration paid to members of the Board of Management in the year under review was EUR 1,488 thousand. Remuneration of EUR 306 thousand was paid to former members of the Board of Management. Additionally, provisions for pensions totalling EUR 15,829 thousand were also recognised for this group of people. Provisions of EUR 170 thousand were recognised for the remuneration of dwpbank‘s Supervisory Board for the past financial year.

3. Total fee for auditor

Expenses of EUR 235 thousand were incurred for the activities of the auditor in the financial year. Of that amount, EUR 180 thousand related to au-dit services, EUR 5 thousand to other assurance services and EUR 50 thousand to other services.

4. Development expenses

During the financial year, the Bank incurred a total of EUR 43,577 thousand in expenses for de-velopment activities. Of that amount, EUR 9,073 thousand was capitalised as intangible assets.

5. Contingent liabilities not shown on the face of the balance sheet

dwpbank has issued a letter of comfort on behalf of dwp Software Kft., Budapest, to the lessor of the company‘s premises.



6. Amounts excluded from distribution

A total of EUR 57,345 thousand was excluded from distribution. That amount comprised EUR 14,996 thousand in accordance with section 253 (6) HGB and EUR 42,349 thousand in accordance with section 268 no. 8 HGB. The amounts exclu-ded from distribution pursuant to section 268 8 HGB consisted of net deferred tax assets and lia-bilities (EUR 20,414 thousand) and capitalised in-ternally generated intangible assets (EUR 21,935 thousand).

Given the amount of the available reserves, there were no restrictions on the distribution of the net income for financial year 2016.

7. Proposal for the appropriation of profits

The Board of Management proposes the following appropriation of profits:

„The net retained profits for the 2016 financial year amounting to EUR 8,724,744.89 shall be appropriated as follows:

Distribution to shareholders in the form of a EUR 0.43 dividend per no-par value share (a to-tal of EUR 8,600,000.00 for 20 million no-par value shares).

Transfer to revenue reserves amounting to EUR 124,744.89.

No profit shall be carried forward.“

8. Members of the Board of Management

The following people were members of the Board of Management of dwpbank in the year under review:

Dr Heiko Beck, BensheimThomas Klanten, BottropDr Christian Tonnesen, Bad Oldesloe (until 31 December 2016)

Mr Markus Neukirch, Oberursel, joined the Board of Management with effect from 1 February 2017.

9. Positions held by members of the Board of Management in supervisory bodies of other companies

Dr Heiko Beck is a member of the Advisory Board of Clearstream International (since 1 June 2016) and was a member of the Supervisory Board of exchangeBA AG i.L. (until 30 June 2016).

Thomas Klanten is a member of the Exchange Council of the Düsseldorf Stock Exchange.

Dr Christian Tonnesen was a member of the Ad-visory Board of Clearstream International (un-til 31 May 2016) and a member of the Exchange Council of Tradegate Exchange (until 31 Decem-ber 2016).

1.

2.

3.

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10. Members of the Supervisory Board

In accordance with the Articles of Association, the Bank‘s Supervisory Board comprises 15 mem-bers; the following people were members of the Supervisory Board:

Thomas Ullrich, ChairmanMember of the Board of Management, DZ BANK AG, Frankfurt am MainDr Klaus Tiedeken, Deputy ChairmanMember of the Board of Management, Kreissparkasse Köln, CologneSven BreidenbachEmployee representative, dwpbank, DüsseldorfWilfried GroosChairman of the Board of Management, Sparkasse Siegen, SiegenLars HilleMember of the Board of Management, DZ BANK AG, Frankfurt am MainDr Detlef HosemannMember of the Board of Management, Landesbank Hessen-Thüringen Girozentrale, Frankfurt am Main

Marc Höttemann Employee representative, dwpbank, Düsseldorf Axel Jungen Employee representative, dwpbank, DüsseldorfChristoph MoersEmployee representative, dwpbank, MunichGregor RothHead of Transaction Management, DZ BANK AG, Frankfurt am MainHelmut SchifferManaging Director, Rheinischer Sparkassen- und Giroverband, MülheimPeter TenbohlenHead of Operations, DZ BANK AG, DüsseldorfChristoph UlmEmployee representative, dwpbank, Munich / Deutscher Bankangestellten-Verband, DüsseldorfJürgen WannhoffVice-President of Sparkassenverband Westfalen-Lippe, MünsterFrank WesthoffMember of the Board of Management, DZ BANK AG, Frankfurt am Main

Thomas KlantenDr Heiko Beck Markus Neukirch

Frankfurt am Main, 28 February 2017



Country-by-country reporting 2016

Deutsche WertpapierService Bank AG, with regis-tered office in Frankfurt am Main, has no foreign branches that conduct banking operations. All disclosures within the meaning of section 26a (1) sentence 2 KWG presented in the annual financial statements relate solely to the Federal Repu-blic of Germany.

Disclosure in accordance with section 26a (1) sentence 2 KWG as at 31 December 2016

Profit before tax amounted to EUR 12.7 million; the tax expense amounted to EUR 4.0 million.

Turnover in EUR million 229.0

Interest income 3.6

Interest expense -1.3

Net interest income 2.3

Fee and commission income 761.7

Fee and commission expense -539.6

Net fee and commission income 222.1

Other operating income 51.1

Other operating expenses -46.5

Net other operating income 4.6

Number of employees on a full-time equivalent basis 1,224

Profit before tax in EUR million 12.7

Taxes on income in EUR million -4.0

Public subsidies received in EUR 0.00

The Bank‘s turnover for the period from 1 Jan-uary 2016 to 31 December 2016 and the number of employees on a full-time equivalent basis as at 31 December 2016 are presented in the table be-low:

The Bank did not receive any public subsidies in the financial year.

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Audit opinion

We have audited the annual financial statements of Deutsche WertpapierService Bank AG, Frankfurt am Main – comprising the balance sheet, the income statement and the notes to the annual financial statements – together with the bookkeeping system and the management report for the financial year from 1 January to 31 December 2016. The maintenance of the books and records and the preparation of the annual financial statements and the management re-port in accordance with German commercial law are the responsibility of the company‘s manage-ment. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, and the manage-ment report based on our audit.

We conducted our audit of the annual financial statements in accordance with section 317 of the German Commercial Code and the generally ac-cepted standards for the audit of financial state-ments in Germany promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the pre-sentation of the net assets, financial position and results of operations in the annual financial statements in accordance with German principles of proper accounting and in the management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the company and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the ac-counting-related internal control system and the evidence supporting the disclosures in the annual

financial statements and the management re-port are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by the company‘s management, as well as evaluating the overall presentation of the annual financial statements and the management report. We believe that our audit provides a reasonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion, based on the findings of our au-dit, the annual financial statements comply with the statutory provisions and give a true and fair view of the net assets, financial position and results of operations of the company in accordance with German principles of proper accoun-ting. The management report is consistent with the annual financial statements, complies with the statutory requirements and, as a whole, pro-vides a suitable view of the company‘s position and accurately presents the opportunities and risks of future development.

Eschborn/Frankfurt am Main, 1 March 2017

Ernst & Young GmbHWirtschaftsprüfungsgeseIlschaft

Meier,German Public Auditor(Wirtschaftsprüfer)

Dombek,German Public Auditor (Wirtschaftsprüferin)



Report of the Supervisory Board

Composition of the Supervisory Board and committee work

In accordance with the Articles of Association, dwpbank‘s Supervisory Board consisted of a to-tal of fifteen members in financial year 2016: ten shareholder representatives and five employee representatives.

Until mid-2016, the Chairman of the Supervisory Board was Wilfried Groos, Chairman of the Board of Management, Sparkasse Siegen, Siegen, and his deputy was Thomas Ullrich, member of the Board of Management, DZ BANK AG, Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main. On 4 July 2016, the members of the Super-visory Board elected Thomas Ullrich as Chairman and Dr Klaus Tiedeken, member of the Board of Management of Kreissparkasse Köln, as Deputy Chairman.

In accordance with the statutory provisions and section 9 of its Rules of Procedure, in 2016, the Su-pervisory Board was advised and assisted by com-mittees formed from amongst its ranks. Based on a resolution of the Supervisory Board adopted in 2014 in accordance with section 25d (10) KWG, these comprise a joint Risk and Audit Committee, a joint Nominating and Executive Committee, a Remuneration Control Committee and a Strategy Committee. The Nominating and Executive Com-mittee, Remuneration Control Committee and Risk and Audit Committee each consist of two shareholder representatives and one employee representative. The Strategy Committee consists of four shareholder representatives.

At their respective meetings, the Committees carried out the tasks assigned to them by the Su-pervisory Board‘s Rules of Procedure, which were revised on 18 June 2014. The Nominating and Exec- utive Committee is responsible for tasks inclu-ding preparing the financial statements; amend-ing and terminating contracts of service with the members of the Managing Board; regularly as-sessing the structure, size, composition and per-formance of management and the Supervisory

Board, which must be carried out at least once per year; regularly assessing the knowledge, skills and experience of both the individual managing directors and the members of the Supervisory Board, as well as those of the respective bodies in their entirety, which must be carried out at least once per year; and supervising the preparation and organisation of Supervisory Board meetings. The Nominating and Executive Committee met a total of three times in 2016. The Remuneration Control Committee performed the tasks assigned in accordance with the Remuneration Regulation for Institutions (Institutsvergütungsverordnung, „InstitutsVergV“). It met a total of three times in 2016. The Risk and Audit Committee is responsib-le for the preliminary review of the documents relating to the annual financial statements, the evaluation of the findings of the audit in accor-dance with section 36 of the German Securities Trading Act (Wertpapierhandelsgesetz, „WpHG“) and the audit of securities accounts, as well as issues relating to risk management and the in-ternal control system. The Risk and Audit Com-mittee met a total of five times in 2016. The Strat-egy Committee is responsible in particular for assisting the Board of Management with issues relating to reviewing the business strategy in line with the strategic requirements of the shareholders‘ associations and advising on the implemen-tation of such strategy. It met once in 2016.

Supervising the Bank‘s management and advising the Board of Management

In 2016, the Supervisory Board again continuous-ly supervised the activities of the Board of Ma-nagement and advised it on the management of the bank. In accordance with its statutory obliga-tions and the responsibilities set out in the Ar-ticles of Association, the Supervisory Board held four meetings during the financial year; in addition, it regularly received detailed written and oral reports from the Board of Management concerning the position and performance of the Bank and took actions to ensure that the Bank‘s management was due and proper. The Chairman of the Supervisory Board also ensured that he was kept apprised of the Bank‘s current develop-ment throughout the year under review by way

59

of regular, comprehensive and timely briefings by the Chairman of the Board of Management. The Supervisory Board was directly involved in all decisions of fundamental importance to the Bank at an early stage. In particular, the topics di-scussed by the Supervisory Board included super-vision of the strategic measures in the context of developing dwpbank into the leading infrastruc-ture services provider in the securities services sector, for instance the systematic alignment of dwpbank‘s processes to ensure quality, effec-tiveness and efficiency, the development of a transparent, uncomplicated pricing model based on individual services and the further develop-ment of the IT infrastructure to render it fit for the future and cost-efficient, as well as a discus-sion of the status of the measures to remedy the findings of the audit conducted in 2015 in accor-dance with section 44 KWG and advising on the periodical updates to the recovery plan in accor-dance with the German Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz, „SAG“).

Annual financial statements for the year ended 31 December 2016

Ernst & Young GmbH, Wirtschaftsprüfungsge-sellschaft, which was elected as the auditor by the Annual General Meeting, audited dwpbank‘s 2016 annual financial statements as prepared by the Board of Management, together with the bookkeeping system and the management re-port. In its unqualified audit opinion on the an-nual financial statements, it stated that its audit did not lead to any reservations. In the opinion of Ernst &Young GmbH, the annual financial state-ments comply with the statutory provisions and give a true and fair view of the net assets, financial position and results of operations of dwp-bank in accordance with German principles of proper accounting. Ernst & Young GmbH believes that the management report is consistent with the annual financial statements and, as a whole, provides a suitable view of the Bank‘s position and accurately presents the opportunities and risks of future development.

The meeting of the Supervisory Board on 27 April 2017 to review the annual financial statements

was attended by the auditors of Ernst & Young GmbH, Wirtschaftsprüfungsgesellschaft, who signed the audit report. In addition, the audi-tors attended the meeting of the Risk and Audit Committee on 23 March 2017, at which the preli-minary review of the documents relating to the annual financial statements took place. They reported in detail on the audit of the annual fi-nancial statements and answered questions from the members of the Supervisory Board. dwpbank‘s annual financial statements, the proposal by the Board of Management for the appropriation of net retained profits and the au-ditors‘ reports were made available to all mem-bers of the Supervisory Board.

The Supervisory Board reviewed the annual fi-nancial statements and the management report in detail and received the corresponding report by the Risk and Audit Committee. There were no objections. Accordingly, the Supervisory Board approved the annual financial statements of dwpbank for the year ended 31 December 2016, which have therefore been adopted.

In addition, the Supervisory Board reviewed the Board of Management‘s proposal for the appropriation of net retained profits for the 2016 finan-cial year. It supports the proposal by the Board of Management, which will therefore be submitted for resolution by the Annual General Meeting as a joint proposal by the Supervisory Board and the Board of Management.

The Supervisory Board would like to express its thanks and its gratitude to the members of the Board of Management and all employees and employee representatives for their hard work and commitment in 2016.

Frankfurt am Main, 27 April 2017

Deutsche WertpapierService Bank AGThe Supervisory Board

Thomas Ullrich,Chairman



Members of the Advisory Board (as at 31 December 2016)

Ralf FleischerChairman of the Advisory Board, Chairman of the Board of Management, Stadtsparkasse München

Peter TenbohlenDeputy Chairman of the Advisory Board, Head of Operations, DZ BANK AG

Marcus VittDeputy Chairman of the Advisory Board, Spokesman of the Board of Management, DONNER & REUSCHEL AG

Hans-Heinrich BernhardtMember of the Board of Management, Volksbank Mittelhessen eG

Jens BratherigMember of the Board of Management, Sparkasse Hannover

Uwe DidwischusDirector for Corporate Services, NORD/LB

Edwin EchlMember of the Board of Management, SEB AG

Heiko FischerHead of Operations Financial Markets, Deutsche Postbank AG

Lanna IdrissHead of Operations, BHF-Bank AG

Carsten JungDeputy Chairman of the Board of Management, Berliner Volksbank eG

Jochen KerschbaumerMember of the Board of Management, Wiesbadener Volksbank eG

Ernst-Josef LehrerDeputy Chairman of the Board of Management, Sparkasse Koblenz

Dr Andreas MartinMember of the Board of Management, Bundesver-band der Deutschen Volksbanken und Raiffeisen-banken e.V. (BVR)

Yoram MatalonHead of Transaction Banking, HSH Nordbank AG

Markus NeukirchHead of Group Market Operations, Commerzbank AG

Klaus OberliesenMember of the Board of Management, Sparkasse Hagen-Herdecke

Wolfgang ReinhartHead of Operations & Services, Bayerische Landesbank

Gregor RothHead of Transaction Management, DZ BANK AG

Dr Joachim SchmalzlExecutive Member of the Board of Management, Deutscher Sparkassen- und Giroverband

Dr Detlef SchmidtDeputy Chairman of the Board of Management, Kreissparkasse Böblingen

Helmut SchmidtChairman of the Board of Management, Kreissparkasse Saale-Orla

Rainer VirnichDeputy Member of the Board of Management, Sparkasse Köln-Bonn

Ewald WespMLP Finanzdienstleistungen AG

Dr Jürgen WiedmannHead of Settlements/Custody Services, Landesbank Hessen-Thüringen Girozentrale

61

Published by:Deutsche WertpapierService Bank AGWildunger Straße 1460487 Frankfurt am MainTel: +49 69 5099 0E-mail: [email protected]

This Annual Report is also available in German.

www.dwpbank.de

Design and copy: edicto GmbH, Frankfurt Board of Management portraits:Markus Hintzen PhotographyPhotography: ©Rockatansky/thinkstockphotos.de ©06photo, Rawpixel/shutterstock.com

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